Japan says its economy could see first positive output gap in 7 years By Reuters

TOKYO (Reuters) – Japan’s government said on Thursday it expects economic output to fully recover next fiscal year for the first time in seven years due to a tight labor market.

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

A positive output gap occurs when real output exceeds the economy’s full capacity, 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 Cabinet Office said.

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

It’s among the data the Bank of Japan watches closely in determining whether the economy is growing strongly enough to sustain demand-driven inflation.

The Cabinet Office expects overall consumer price growth, which includes new prices, to slow to 2% next financial year from 2.5% this year.