BOJ Now Sees Negative Output Gap, But Plays Down Its Importance

(Bloomberg) -- The Bank of Japan says the economic fallout from the coronavirus will force another key measure of inflationary pressure to turn negative for the time being.

In its full quarterly outlook report published Thursday, the bank projected Japan’s output gap, a gauge of supply and demand, will soon fall below zero for the first time since 2016, although it didn’t give a specific number.

Since April, the BOJ has also been forecasting that core consumer prices will average about -.0.5% this fiscal year, before growing again in the 12 months after that.

In times past, the central bank has often pointed to a positive output gap as a key reason for not adding monetary stimulus, even when CPI was weakening. Now both measures are negative or soon to be.

Yet the bank is sticking to its position that it hasn’t lost its longstanding campaign to spur stable price growth. Wednesday, after the BOJ stood pat on policy, Governor Haruhiko Kuroda said again that Japan isn’t falling back into deflation.

Kuroda Sits Tight as BOJ Monitors Economy’s Move Beyond Worst

The outlook report offered a possible explanation for Kuroda’s thinking, saying the bank hasn’t seen businesses start to actively cut prices despite the recession.

The bank suggested several potential reasons. Among them, poor productivity gains and the relative weakness of the yen, which pushes up import prices. Both factors leave businesses with little room to contemplate price cuts.

©2020 Bloomberg L.P.