Measuring Potential Growth in Japan: Some Practical Caveats

Economists at central banks and in academia have made various efforts to measure potential growth, something that cannot be observed directly. This review introduces some of these estimation techniques and applies them to the Japanese data. The estimates of the potential growth rate can differ considerably, depending on the methods used; all of these estimates are subject to substantial errors; and the reliability of the estimates is severely hampered whenever turbulence is rife in the economy. Although all approaches introduced in this review suggest that the potential growth rate in Japan has recently declined, significant uncertainty remains regarding the magnitude of its fall. Substantial margins of error must be taken into account with any estimates of the potential growth rate.