MNI BRIEF: Japan Output Gap Weaker Thank BOJ Forecast

Japan's output gap widened to -0.43pp in Q4 from the previous quarter's -0.08pp, which contradicts the Bank of Japan's view the output gap will turn positive in the second half of fiscal 2022.

BOJ data released Wednesday showed the gap – the 11th consecutive negative print – will eventually reduce inflation pressure. Bank officials want sustainable improvement to the output gap to inform their inflation outlook.

Bank officials are focused on the underlying price trend, which is determined by the output gap and medium- to long-term inflation expectations.

The officials now expect the output gap to improve Q1 2023 as the economy recovers, particularly as inbound tourism resumes. "With Japan's economy following a growth path that outpaces its potential growth rate, the gap is projected to turn positive around the second half of fiscal 2022 and then continue to expand moderately,” the Bank said in its Outlook Report.

The BOJ bases its estimate on capital and labour stocks and its figure is smaller than the Cabinet Office's -2.0pp Q4 estimate.