Methodology for Estimating Output Gap and Potential Growth Rate: An Update
May 31, 2017
Research and Statistics Department
Bank of Japan
This paper explains the new methodology for calculating Japan's output gap and potential growth rate, both of which are regularly estimated and released by the Research and Statistics Department of the Bank of Japan. We have revised the estimation method given: (1) the retroactive revision of Japan's GDP statistics; (2) the newly available capital stock data which is in line with the new 2008SNA guidelines and adjusted for economic depreciation; and (3) recent structural changes in the factor markets for labor and capital that should be reflected in these estimated trends.
Specifically, we have changed our estimation methodology in the following three ways: first, we have revised the estimation method of the "labor force participation rate gap," so as to reflect the recent sustained increase in the labor force participation rate starting around 2012 as a structural trend; second, we have revised the estimation method of the "hours worked gap," to identify the persistent decline in working hours over recent years as more of a structural development possibly due to changes in people's working styles; and third, we have revised the method for calculating the manufacturing "utilization gap," in order to reflect the economic depreciation of equipment and structures more appropriately.
Taking a look at the revised output gap, we find that the overall picture for most of the recent period remains unchanged. Furthermore, it turns out that the inflation-prediction power of the revised output gap is almost unchanged from the previous version. Meanwhile, the resulting potential growth rate shows a significant upward revision for the last few years, mainly reflecting a rise in the TFP growth rate associated with the revision of the GDP statistics. As a result, the potential growth rate in recent years is estimated to be in the range of 0.5-1.0 percent, which is comparable to that of the first half of the 2000s, prior to the global financial crisis.
We would like to thank Toshitaka Sekine, Koji Nakamura, Makoto Minegishi, and Hibiki Ichiue as well as the staff of the Bank of Japan for their helpful comments. We also thank Hiroshi Kawata for preparing the performance comparison of Phillips curve analysis, and Yuko Koyama, Fumiko Haraguchi, and Megumi Mochizuki for assisting the data compilation. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan. This paper is an English translation of the original Japanese released on April 28, 2017. The translation was mostly prepared by Lisa Uemae.
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