MNI POLICY: BOJ: Q3 Output Gap Narrows To -3.34 PPS In Q3

Japan's output gap is seen at -3.34 percentage points in Q3, improving from the -4.75% pp reading in Q2, the Bank of Japan said Wednesday. The negative reading in Q2 was the first since the third quarter of 2016 when it was -0.15 pps, and 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 fourth quarter as economic activities resumed 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 smaller than the Cabinet Office's last estimate of -6.2 pps, which is only based on second preliminary Q3 GDP data showing a 5.3% rise q/q, or an annualized rate of +22.9%. The Cabinet Office's Q3 estimate is not yet available, with no confirmed publication date.

The central bank also said that Japan's potential growth rate for the April-September 2020 period was estimated at -0.01%, down from 0.08% for the October 2019-March 2020 period.

The Cabinet Office estimates Japan's potential growth rate to be about 0.7% in the July-September period, unchanged from the second quarter of 2020.