TOKYO (MNI) – Japan’s negative output gap — excess capacity vs.
slack demand — shrank to -3.5% in the July-September quarter from a
revised -4.3% (preliminary -4.5%) in April-June, improving for four
straight quarters, the Cabinet Office said on Monday.

The Q3 negative gap was the smallest since -1.4% marked in Q3 of
2008, when the U.S. investment firm Lehman Brothers collapsed.

“The negative output gap is improving but it remains large. Close
attention should be paid to its development as the economy is pausing,”
the Cabinet Office said.

The Cabinet Office calculated the negative output gap on the
assumption that Japan’s annual potential economic growth rate stands at
+0.6%, slightly higher than its previous estimate of +0.5%.

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

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

The preliminary real gross domestic product for July-September
posted an above-potential +3.9% at an annualized rate, thanks to robust
increases in consumption boosted by rush purchases of automobiles and
cigarettes as well as record high temperatures which buoyed spending on
beverages and summer clothing.

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

The negative output gap has been improving gradually since hitting
the largest on record of -8.3% in Q1 of 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 of
2009.

But improvement in the negative output gap may pause in
October-December this year as GDP in the current quarter may contract
after a surge in consumption on one-off factors in July-September fades
out.

According to the latest survey by the Cabinet Office’s Economic
Planning Association conducted through early this month, 41 economists
on average forecast Q4 GDP will slump by an annualized 0.88% after
growing at 3.9%.

However, the economists polled do not expect the Japan’s economy to
plunge into a double-dip recession, projecting GDP in the first quarter
of 2011 will rebound by an annualized 1.0%.

The Cabinet Office will update its estimate of the output gap next
month after revising Q3 GDP on Dec. 9 by factoring in demand-side
corporate data to be released by the Ministry of Finance on Dec. 2.

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

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