Updates on the Output Gap and Potential Growth Rate, and Monitoring Labor Market Indicators

The Research and Statistics Department of the Bank of Japan has revised the methodology for calculating the output gap and potential growth rate, which are regularly estimated and released, taking into account the benchmark year revision of 2020 in GDP statistics and recent changes in economic structure. The main changes include: (1) regarding the capital utilization rate, the source data has been changed from a quantity basis to a "value-added basis," which accounts for quality improvements, resulting in an adjustment of the downward bias that has occurred in capital utilization rate for the manufacturing sector; (2) for the structural unemployment rate, the estimation method has been revised to more accurately capture mismatches in the labor market, given the recent shift from the use of the Public Employment Security Office to the use of private employment agencies; and (3) the potential growth rate has been re-estimated using the 2020 base-year GDP and capital stock statistics, through the calculation of the total factor productivity growth rate. In order to assess economic and price developments, using estimates of the output gap to identify the aggregate supply and demand balance remains critical. However, in recent years, and amid intensifying labor supply constraints, developments in labor input and labor market tightness appear to exert an increasingly significant influence on economic activity in labor-intensive sectors and price trends. Against this backdrop, this paper also conducts a brief empirical performance exercise of labor market indicators that are considered to be suitable for complementary monitoring of the output gap, given their relevance to forecasting wages and prices.