Japan’s Economy is Expected to Report its First Positive Output Gap in 7 Years.

Japan’s government announced on December 26 that it expects the nation’s economic output to reach full capacity in the next fiscal year for the first time in seven years, driven by a tight labor market. The country’s output gap, which reflects the difference between actual and potential output, is projected to be +0.4% for the fiscal year starting in April. A positive output gap suggests that actual output is surpassing the economy’s full capacity, indicating strong demand.

With Japan’s labor force stabilizing at approximately 69 million workers, labor shortages are anticipated to limit supply. The output gap had been negative since fiscal 2019, dropping to -4.5% in fiscal 2020 during the pandemic. This data is closely monitored by the Bank of Japan to assess whether the economy is growing sufficiently to drive inflation through increased demand.

The Cabinet Office also forecasted that the overall consumer price index, which includes fresh food prices, will rise by 2% in the next fiscal year, a slowdown from the 2.5% growth expected this year.