Japan’s Economic Outlook

TOKYO (Reuters) – Japan’s government announced on Thursday that it expects economic output to fully recover in the next fiscal year, marking the first recovery in seven years.

This recovery is attributed to a tight labor market, with an estimated output gap of +0.4% in the fiscal year beginning in April, as reported by the Cabinet Office.

A positive output gap indicates that actual output is surpassing the economy’s full capacity, signaling strong demand.

With a stable labor force of around 69 million workers, the Cabinet Office warns that labor shortages could limit supply.

Japan’s output gap dipped into negative territory in fiscal 2019, reaching a low of -4.5% during the pandemic in fiscal year 2020.

This data is closely monitored by the Bank of Japan to assess whether the economy is robust enough to trigger a demand-driven rise in inflation.

The Cabinet Office also forecasts that the overall consumer price index growth, which includes fresh food prices, will decline to 2% next fiscal year from 2.5% this year.