TOKYO (Reuters) – Japan’s government said on Thursday it expects economic output to reach full capacity next fiscal year on an annual basis for the first time in seven years due to a tight labor market.
Japan’s output gap, which measures the difference between an economy’s actual output and potential output, is expected to be +0.4% in the fiscal year starting in April, according to an estimate released by the Cabinet Office.
A positive output gap occurs when actual output exceeds the total capacity of the economy and is considered a sign of strong demand.
With Japan’s labor force at around 69 million workers, labor shortages are likely to constrain supply, the Cabinet Office said.
Japan’s output gap entered negative territory in fiscal 2019, falling to -4.5% in fiscal 2020 during the pandemic.
That’s one of the data points the Bank of Japan watches closely to determine whether the economy is expanding strongly enough to drive a demand-led rise in inflation.
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The Cabinet Office expects the increase in the overall consumer price index, which includes fresh food prices, to slow to 2% in the next fiscal year, compared to 2.5% this year.
