MNI BRIEF: BOJ: Q3 Output Gap Hits 22nd Negative Figure

Japan’s output gap was estimated at -0.35% in Q3, narrowing from -0.40% in Q2 but remaining in negative territory for the 22nd consecutive quarter, Bank of Japan data released Wednesday showed, suggesting that upward pressure on prices continues with a lag, though the pace remains slow.

The BOJ’s estimate, based on capital and labour stocks, is smaller than the Cabinet Office’s latest estimate of -0.2% in Q3, compared with +0.6% in Q2. The Cabinet Office calculation is based solely on revised second preliminary Q3 GDP data, which showed a 0.6% q/q contraction, or an annualised rate of -2.3%.

In its October Outlook Report, the BOJ said the output gap, which captures utilisation of labour and capital, has followed an improving trend despite fluctuations. The bank expects the gap to remain around its current level for the time being, before improving again toward the end of the projection period to March 2028.

The BOJ also said upward pressure on wages and prices is likely to be stronger than suggested by the output gap, as firms across many industries have begun to face labour supply constraints.

Japan’s potential growth rate for the April–June period was estimated at 0.66%, up from 0.59% for the October 2024–March 2025 period, the BOJ said. It added that the potential growth rate data are as of October 2025, as capital stock data reflecting the revision of the benchmark year to 2020 are not yet available.

By comparison, the Cabinet Office estimates Japan’s potential growth rate at around 0.5% in the July–September period, unchanged from 0.5% in the second quarter of 2025.