Output Gap

According to the BoJ's estimate, the output gap, was a positive 0.6% as of the last quarter of 2016. An improving output gap is an encouraging sign for the BoJ to achieve its reflation goal of 2% inflation.

Published quarterly by the Bank of Japan and Cabinet Office. Updated till the quarter of October-December 2016  (Bank of Japan estimate published on April 5th, 2017. Revised Cabinet office estimates published on March 15th, 2017)

Note: Quarterly estimates of Potential Growth Rate, TFP, Capital and Labor stock contribution for the year 2011 are not available due to the Great East Japan Earthquake.

Brief overview of "Output Gap"

Output Gap measures the difference between actual GDP of the economy and the highest sustainable GDP. The latter is called potential GDP, and the growth in the potential GDP is called potential GDP growth. The output gap is usually measured as a percentage of the potential GDP. 

The output gap is an important indicator for policy makers as it helps them determine an appropriate policy for the economy. A positive output gap indicates a possible inflationary pressure within the economy and vice versa. It is also important for policy makers to understand the source of growth, either labor, capital or productivity. The Bank of Japan publishes a breakdown of growth by estimating contributions from Total Factor Productivity (TFP), labor and capital. 

In the recent history, Japan has experienced the severest negative output gap, exceeding more than 7% to GDP in early 2009 after the Lehman shock. Since then, the output gap has gradually closed, reaching zero in early 2014. However, since then, the output gap has remained steady. In order for the Japanese economy to experience a reflation, the output gap probably needs to further rise towards positive territory. Japan's potential growth rate have been on a gradual decline since the recent peak of 4 to 5% growth in mid 1980s. Most recently, the potential growth rate is estimated to be close to zero. 

For more information, please visit the Cabinet Office web site here 

or the BoJ web site here.

For the estimation methodology employed by the BoJ, please see here.

Output Gap and Potential GDP based on SNA93

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