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

TOKYO (Reuters) – Japan’s government said on Thursday it expected annual economic output to return to full capacity next fiscal year for the first time in seven years amid a tight labor market.

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

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

With Japan’s labor force at a plateau of about 69 million workers, labor shortages are likely to limit supply, the government office said.

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

It’s one of the data the Bank of Japan is watching closely to determine whether the economy is expanding strongly enough to spur demand-led growth in inflation.

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