Japan's GDP Gap Rate Hits 11-Year Low Due to Demand Contraction... Rising Deflation Concerns

Q2 GDP Gap Rate at -5.53%... First Negative Turn in 3 Years and 9 Months

[Image source=EPA Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Japan's economy experienced the most severe demand contraction in 11 years during the second quarter of this year. This is attributed to the deterioration in consumption and employment and stagnation in corporate activities caused by the COVID-19 pandemic.

According to data recently released by the Bank of Japan (BOJ) on the 12th, Japan's GDP gap rate for the second quarter recorded -4.83%, the lowest in 11 years since the second quarter of 2009 (-5.53%). It is the first time in 3 years and 9 months since the third quarter of 2016 (-0.16%) that Japan's GDP gap rate turned negative.

The GDP gap rate is an indicator that assesses the economy by the difference between real GDP and potential GDP, showing how much total demand and supply in the economy differ. When this indicator records a negative value, it suggests deflation, and when positive, it indicates a higher possibility of inflation. A negative value means total supply exceeds total demand.

Japan's GDP gap rate hit a low of -5.53% in the second quarter of 2009 during the global financial crisis, then turned positive in the fourth quarter of 2013, but reverted to negative in the second quarter of 2014 after only two quarters, and continued negative until the third quarter of 2016 except for the first quarter of 2015. Afterwards, it turned positive, rising to 2.23% in the fourth quarter of 2018.

The severe demand contraction in Japan during the second quarter is believed to be influenced by the state of emergency declaration to prevent the spread of COVID-19, coupled with worsening employment conditions and a sharp decline in factory operation rates. Takahide Kiuchi, chief economist at Nomura Research Institute and former BOJ official, stated on NHK broadcast, "The negative GDP gap rate indicates a tendency for price declines and raises concerns that the Japanese economy may return to a deflationary situation."