Japan says its economy likely to mark first positive output gap in 7 years

TOKYO (Reuters) – Japan’s government said on Thursday it predicts economic output will recover to full capacity in the next fiscal year for the first time in seven years on an annual basis due to a tight labour market.

Japan’s output gap, which measures the difference between an economy’s actual and potential output, is likely to stand at +0.4% in the fiscal year starting in April, according to an estimate released by the Cabinet Office.

A positive output gap occurs when actual output exceeds the economy’s full capacity, and it is considered a sign of strong demand.

With Japan’s labour force at a plateau of about 69 million workers, labour shortages are likely to restrict supply, the Cabinet Office said.

Japan’s output gap slipped into the negative territory in fiscal 2019, falling to as low as -4.5% in fiscal year 2020 during the pandemic.

It is among data the Bank of Japan watches closely in determining whether the economy is expanding strongly enough to propel a demand-driven rise in inflation.

The Cabinet Office expects growth in the overall consumer price index, which includes fresh food prices, to slow to 2% in the next fiscal year from 2.5% this year.