The recent deflationary gap in Japan: a quantitative measurement

Abstract

Undoubtedly, the deflationary gap in the economy of recent Japan is very great. However, the White Paper series of EPAJ (Economic Planning Agency of Japanese Government) in recent years depends on a questionable interpretation of the concept of the gap, so that its analyses have been very misleading. In this paper, the author made up his mind to try to contrive an alternative way for measurement of the deflationary gap. The estimating procedure in the present study is as follows: 1. Computation of aggregate full employment and full utilization indexes of labor force and enterprises’ real fixed capital stock, by the use of original weights and adjusted weights, 2. Experimental-exogenous setting of the δ ratio, i.e., the ratio of the yearly rate of technological progress(%) to the yearly growth rate of real GNP(%) 3. Computation of the indexes of full-capacity GNP corresponding to each δ ratio, 4. Measurement of the deflationary gap. In the light of the computed results, we conclude that the deflationary gap in the recent (1997) Japan would amount to around 30–40% of the potential full-capacity GNP. The excessive breeding of deflationary gap in the Japanese economy was not a cyclical phenomenon but a long-term cumulative trend.