Japan already an ‘excess demand’ economy… rate hikes gain momentum

The output gap: demand minus supply

Turned positive from 2022

Strong inflationary pressure, in other words

Japan’s economy appears to have shifted into an “excess demand” state starting about four years ago. With inflationary pressures mounting, expectations are growing that the Bank of Japan will gain further justification for raising its policy rate.

According to the Nihon Keizai Shimbun on the 27th, the Bank of Japan released the previous day the results of a re-estimation of the “output gap,” which subtracts supply capacity from demand in the Japanese economy. The re-estimated output gap remained negative from April–June 2020—when economic activity stagnated due to the spread of COVID-19—through October–December 2021, then entered positive territory from January–March 2022. It has stayed positive for 3 years and 9 months through the most recent period, July–September 2025.

Until now, the Bank of Japan had said the output gap was negative due to weak demand for 5 years and 6 months from April–June 2020 through July–September 2025. Typically, a positive output gap is seen as inflationary, while a negative gap is associated with disinflation.

The Nikkei wrote, “This means a condition in which upward pressure on prices is likely to persist,” adding that “as the Bank of Japan has stated the output gap is already in positive territory, the likelihood has increased that it will continue normalizing monetary policy, including raising the policy rate.”

Haruhiko Kuroda, former governor of the Bank of Japan who pursued massive monetary easing under the Shinzo Abe administration, said, “The era of deflation is completely over.” In an interview with the Nikkei on the 25th, Kuroda said that “the deflationary mindset broke down during the Ukraine war,” arguing that the policy rate should be raised by 0.25% each time, 2 to 3 times a year.

Tokyo=Correspondent Kim Il-gyu black0419@hankyung.com