Japan’s third-quarter output gap turns negative in blow to BOJ’s inflation goal

TOKYO (Reuters) – Japan’s output gap in the third quarter turned negative for the first time in almost two years, in a sign the Bank of Japan’s 2 percent inflation target will become even more distant due to waning price pressure.

A negative output gap occurs when actual output is less than the economy’s full capacity and is considered a sign of weakening demand.

Japan’s economy contracted in the third quarter by the most in four years due to a strong earthquake, severe floods and worries about global trade friction.

Japanese companies quickly rebounded from the natural disasters, but there are worries that China’s economic slowdown from its trade war with the United States will have a more lasting negative impact on Japan’s economy.

The BOJ has repeatedly said inflationary pressure will build up as long as the output gap remains positive, but this argument will be undermined if the output gap turns negative.

In July-September the output gap was minus 0.2 percent, the Cabinet Office said on Tuesday, versus plus 0.7 percent in the previous quarter. That marked the first time the output gap was negative since the fourth quarter of 2016.

The BOJ is expected to keep monetary policy on hold after a two-day meeting that ends Thursday.

Subdued inflation has forced the BOJ to maintain its massive bond-buying program despite the rising cost of prolonged easing, such as the hit to financial institutions’ profits from near-zero interest rates.

A negative output gap casts doubt on the central bank’s argument that it can achieve its inflation target just by maintaining its current stimulus.

The BOJ launched a massive quantitative easing scheme in 2013 to achieve 2 percent inflation and eliminate the risk of sliding back into crippling deflation. Its bond buying has been successful in keeping rates low, but has not stimulated inflation as quickly as the central bank had hoped.

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