TOKYO (MNI) – Japan’s negative output gap — excess capacity vs.
slack demand — stood at -3.1% in the third qurater, revised up from a
preliminary -3.5%, the Cabinet Office said on Monday.

The ministry reviewed the output gap figure initially released on
Nov. 22, factoring in the revised GDP figures for July-September
released on Dec. 9. Q3 GDP rose 1.1% q/q, revised up from a preliminary
0.9% gain, with the annualized rate was revised to 4.5% from 3.9%.

The Q3 revised output gap was still smaller than -4.0% in Q2
(revised up from -4.5%), improving for the fourth straight quarter, The
Q3 gap was the smallest since -0.8% marked in Q3 2008, when the U.S.
investment firm Lehman Brothers collapsed.

The Cabinet Office calculated the negative output gap on the
assumption that Japan’s annual potential (non-inflationary) economic
growth rate now stands at only +0.4%, lower than its preliminary
estimate of +0.6%.

The Bank of Japan estimates the potential growth rate at around
+0.5%.

The negative output gap shrinks when actual GDP growth is above
potential growth.

Revised Q3 GDP was well above potential thanks to a robust gain in
private consumption. Consumer spending was boosted by rush purchases of
automobiles ahead of the end of government purchase subsidies and of
cigarettes ahead of a tax increase. In addition, record high
temperatures buoyed spending on beverages and summer clothing.

The BOJ closely watches the output gap, which is believed to have a
major impact on prices with a lag of about 12 months.

The output gap has been improving gradually since hitting a record
negative gap of -9.3% in Q1 2009. The year-on-year drop in core CPI
(excluding fresh food but including energy) has also been decelerating
slowly after hitting the record drop of -2.3% in Q3 2009.

But improvement in the negative output gap may pause in the current
quarter because the economy is expected to contract after the one-off
factors that boosted July-September growth fade out.

According to the latest survey conducted by the Cabinet Office’s
Economic Planning Association month, the average forecast of 42
economists calls for Q4 GDP to slump at an annualized rate of 1.92%.

However, the economists polled do not expect the Japan’s economy to
fall into a double-dip recession, projecting annualized GDP growth of
+0.62% in Q1 next year and +1.42% in Q2.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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