Japan's government announced on December 26, 2024, that it anticipates the country's economic output will return to full capacity in the next fiscal year for the first time in seven years. This forecast is attributed to a tight labor market.
The Cabinet Office estimates that Japan's output gap, which indicates the difference between actual and potential output, will be +0.4% in the fiscal year beginning in April. A positive output gap signifies that actual output is exceeding the economy's full capacity, reflecting strong demand.
Despite the optimistic outlook, the Cabinet Office cautioned that labor shortages, stemming from a plateau of approximately 69 million workers, may limit supply. The output gap had previously turned negative in fiscal 2019, reaching as low as -4.5% during the pandemic in fiscal year 2020.
This data is closely monitored by the Bank of Japan as it assesses whether the economy is expanding sufficiently to trigger a demand-driven rise in inflation. The Cabinet Office also projects a slowdown in the overall consumer price index growth, estimating it will decrease to 2% in the next fiscal year from 2.5% this year.