Japan’s economy is projected to reach full capacity in the next fiscal year, marking the country’s first positive output gap in seven years, the government announced Thursday. The Cabinet Office estimates a +0.4% output gap in the fiscal year starting in April, signaling robust demand driven by a tight labor market.
With Japan’s workforce steady at around 69 million, labor shortages are expected to constrain supply, reinforcing inflationary pressures. Japan’s output gap turned negative in fiscal 2019, hitting -4.5% during the pandemic but is now poised to recover.
The Bank of Japan (BOJ) monitors the output gap closely as an indicator of sustainable economic expansion and demand-driven inflation. The Cabinet Office anticipates consumer price index (CPI) growth, including fresh food, to slow to 2% in the next fiscal year, down from 2.5% this year.
Meanwhile, BOJ Governor Kazuo Ueda expressed optimism that stable 2% inflation, supported by wage growth, is within reach. Ueda forecasted that economic momentum will intensify in 2025, driving sustainable inflation alongside rising wages.
Although investors expect the BOJ to raise interest rates, opinions vary on timing. Some predict a rate hike in January, while others foresee action in March, following Japan’s annual wage negotiations.
Ueda emphasized that while Japan’s economy transitions toward stable inflation, the BOJ will maintain accommodative monetary policies. However, he warned that prolonged easy conditions could accelerate inflation beyond the 2% target, potentially forcing rapid rate hikes that might hinder investment and wage growth.