Output Gap

Output gap are turning disinflationary.

Published quarterly by the Bank of Japan and Cabinet Office. Cabinet Office estimates updated till the quarter of October-December 2020. Bank of Japan estimates updated till the quarter of July-September 2020 (Bank of Japan estimates published on December 15th, 2020)

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 policymakers as it helps them to 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 policymakers to understand the source of growth, either labour, capital or productivity. The Bank of Japan publishes a breakdown of growth by estimating contributions from Total Factor Productivity (TFP), labour and capital. 

Japan has experienced its severest negative output gap in recent years, exceeding more than 5% to GDP in early 2009, after the Lehman shock. Since then, the output gap has gradually closed, reaching nearly zero in late 2013. According to the Bank of Japan’s estimation, it turned positive in late 2016 and peaked in late 2018. However, it gradually declined again but kept positive. For the Japanese economy to experience a reflation, the output gap would need to rise further towards more positive territory. Japan's potential growth rate has been on a gradual decline since the recent peak of 4 to 5% growth in the mid-1980s. Most recently, the potential growth rate is estimated to be close to zero. 

For more information, please visit the Cabinet Office website and the BoJ website.

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

Output Gap and Potential GDP based on SNA93

Next Release Date: BOJ estimate: April 4th, 2021

                                 Possible output gap release: May 25th, 2021





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