The New Estimates of Output Gap and Potential Growth Rate

The Bank of Japan (BOJ) estimates the output gap and the potential growth rate, and uses these in judging economic and price conditions. The output gap and potential growth rate have been recently re-estimated in light of the benchmark revision of the GDP statistics at the end of 2005. At the same time, the estimation methods have also been thoroughly re-examined and changed. The changes include incorporating the structural changes in the labor market that have become clear over the past few years, as well as improving the data used for capital stock. We have also redefined the meaning of potential GDP. The new output gap takes positive or negative values in comparison with the average past levels of the capital and labor utilization ratios. As for recent developments, the output gap had a large negative value when the present economic recovery began, has been steadily improving ever since, and is presently in the vicinity of zero. This level surpasses the recent peak recorded in 2000 and is more or less equal to the peak in 1997. The new potential growth rate had been hovering around 1% or slightly less since the end of the 1990s, and has recently been recovering to between 1.5% and 2.0%. These figures, however, need to be viewed with some latitude, as the output gap and potential growth rate estimates may be revised in retrospect as new data become available.