TOKYO: Domestic demand in Japan outpaced production capacity for the first time in six years in January-March, the Bank of Japan said in its monthly report on Wednesday, a positive sign that inflation will move toward the central bank's 2 percent target.
A positive output gap will help the BOJ make the argument that it can meet its 2 percent price growth goal next year, as slack in the economy has been eliminated and domestic demand is outpacing production capacity.
The output gap was plus 0.6 percent of gross domestic product in January-March, turning positive for the first time since April-June 2008, when the output gap was plus 0.7 percent.
BOJ Governor Haruhiko Kuroda expressed confidence on Tuesday that inflation would hold above 1 percent even when a boost from imported energy costs fades.
The BOJ has left policy unchanged since it launched a massive stimulus drive in April last year, when it pledged to pull Japan out of chronic deflation and push up consumer price inflation to 2 percent in roughly a year from now.
There are lingering concerns that consumer spending could falter, but Kuroda and other BOJ officials have repeatedly stressed that a tight labour market and upward pressure on wages will prevent domestic demand from weakening.
The output gap - or the difference between actual and potential gross domestic product - has been showing Japanese growth falling short of its potential since 2008, when the global financial crisis saddled Japanese companies with substantial surplus capacity.
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