MNI POLICY: BOJ Sees Q2 Output Gap Turn Negative; 1st In 15 Qs

Japan's output gap has been estimated at -4.83 percentage points in Q2, a reversal from the +0.24 pps in Q1, the Bank of Japan said Monday. The negative reading, the first since the third quarter of 2016 when it was -0.16 pps, suggests possible downward pressure on consumer prices and inflation expectations, albeit with a lag of a few quarters.

The indicator is expected to improve in the third quarter as economic activities resume but the improvement may be limited as the capacity utilization ratio remains low.

The BOJ's estimate of the output gap, based on capital and labour stocks, is wider than the Cabinet Office's last estimate of -2.4 pps, which is only based on revised Q1 GDP data showing a 0.6% fall q/q, or an annualized rate of -2.2%. The Cabinet Office's Q2 estimate is not yet available, with no confirmed publication date.

The BOJ also said that Japan's potential growth rate for the April-June quarter was estimated at 0.07%, down from 0.12% for the October-March 2020 period. This is below the bank's latest estimate of 0.5%-1.0% provided in the January Outlook Report.

The Cabinet Office estimates Japan's potential growth rate to be about 0.9% in the January-March period, unchanged from the fourth quarter of 2019.