MNI BRIEF: Japan Q1 Output Gap Narrows To -0.34pp - BOJ

Japan's estimated Q1 output gap has narrowed to -0.34pp from -0.37pp in Q4 2022 – the 12th straight negative read, indicating upward pressure on prices is increasing slightly with a time lag, Bank of Japan data showed Wednesday.

The BOJ expects the gap to turn positive around the middle of fiscal 2023 and to expand moderately toward the end of the projection period to March 2026. The Bank estimated a smaller output gap, based on capital and labour stocks, than the Cabinet Office's latest estimate of -0.7pp in Q1 (vs. -1.2pp in Q4), which was based on second preliminary Q1 GDP data showing a 0.7% q/q rise, or an annualised rate of 2.7%.

The BOJ expects inflation expectations to rise moderately toward the end of the projection period, with improvement in the output gap and changes in firms' price- and wage-setting behavior, and in labor-management wage negotiations. Japan's potential growth rate between October 2022 and March 2023 was estimated at 0.32%, up from 0.21% for the April-September 2022 period, the BOJ added.

The Cabinet Office estimates Japan's potential growth rate to be about 0.4% in Q1, unchanged from Q4 2022.