The Cabinet Office forecast that demand will outstrip supply in fiscal 2025 to put a brake on deflation.
It assessed the gap will be plus 0.4 percent, eliminating the demand shortfall. This would mark the first positive gap in seven years, making it easier for prices to rise.
The forecast is entirely in line with government moves to end deflation.
This outlook was unveiled at the Cabinet Office’s Council on Economic and Fiscal Policy meeting on Dec. 26.
The supply-demand gap becomes positive when the quantity of demand, such as consumer spending and capital investment, exceeds the supply capacity.
According to the Cabinet Office estimate, the gap will remain at minus 0.3 percent for fiscal 2024 but turn positive in the next fiscal year starting in April.
Nominal wage growth that exceeds the rate of price inflation is expected to take root in the new fiscal year, leading to an upturn in personal consumption and other sectors, according to the estimate.
Even with continued high prices, the government has refrained from declaring an end to deflation. This is because it fears a return to deflation in which prices fall continuously.
The government cited the supply-demand gap as one of the indicators it will focus on.
To ensure that deflation is brought under control, the government will continue to support consumption and investment through tax cuts and subsidies.
But those priorities could change once deflation is conquered.
Past estimates by the Cabinet Office are markedly more optimistic than forecasts by private-sector economists and other institutions.
The real growth rate for the current fiscal year was originally projected to hit 1.3 percent but was revised downward and is now at 0.4 percent.
It is also uncertain whether the supply-demand gap will improve as forecast.
