The output gap is still far from what BOJ officials predicted as they had expected it to turn positive around the second half of fiscal 2022 and then continue to expand moderately, with Japan’s economy following a growth path that outpaced its potential growth rate.
The narrowing negative output gap indicated that upward pressure on consumer prices and inflation expectations will strengthen, albeit with a lag of a few quarters.
The BOJ's estimate of the output gap, based on capital and labour stocks, is smaller than the Cabinet Office's last estimate of -2.7 pp in Q2 (vs. -3.3 pp in Q1). The Cabinet Office's estimate is based only on second preliminary Q2 GDP data showing a 0.9% rise q/q, or an annualized rate of +3.5%..
The central bank also said that Japan's potential growth rate for the April-June period was estimated at 0.20%, up from 0.13% for the October 2020 - March 2021 period. The Cabinet Office estimates Japan's potential growth rate to be about 0.6%.