Japan’s economy sees output exceed capacity the most in 9 years

By Leika Kihara and Sumio Ito

TOKYO, Oct 4 (Reuters) – Japan’s economy saw output exceed full capacity by the most in nine years in the April-June quarter, a Bank of Japan estimate showed, a positive sign for the central bank as it seeks to accelerate inflation to its elusive 2 percent target.

The output gap, which measures the difference between an economy’s actual and potential output, stood at plus 1.22 percent in April-June, staying in positive territory for the third straight quarter, the BOJ estimate showed on Wednesday.

The positive output gap exceeded 1 percent for the first time since January-March 2008 – months before the collapse of Lehman Brothers triggered a global financial crisis.

The outcome backs up the BOJ’s view that Japan’s economy is gathering enough momentum for inflation to accelerate toward its 2 percent target, and justifies it from keeping policy steady.

But some studies show there can be a lag between achieving a sustained positive output gap and an actual business response, such as a boost in investment and a pick-up in inflation.

“We’ve seen a dramatic improvement in Japan’s economy,” BOJ Deputy Governor Hiroshi Nakaso told Asahi newspaper in an interview.

“Corporate profits are at record-high levels, the job market is near full employment and wages are rising, albeit moderately. Monetary policy has made huge contributions,” he said.

A positive output gap occurs when actual output is more than full capacity. This happens when factories and workers operate above their most efficient capacity to meet strong demand.

When a positive output gap expands, it is a sign that inflationary pressure is building.

Japan’s economy expanded at an annualised 2.5 percent in the second quarter as consumer and company spending picked up, with steady growth likely to be sustained in coming quarters.

Demand for labour remained at the strongest level since 1974 in August, while business confidence hit a decade-high in the third quarter thanks to robust global growth.

But price and wage growth remain weak with firms still wary of passing more of their profits to employees, forcing the BOJ to push back the timing for reaching its price target six times since deploying a massive stimulus programme in 2013.

Core consumer prices rose 0.7 percent in August from a year earlier, well below the BOJ’s target, heightening the chance the central bank will cut its price forecasts again at a rate review on Oct. 30-31. (Reporting by Leika Kihara; Editing by Kim Coghill)