Japan Q1 output gap revised up to 15-year high

TOKYO, June 18 (Reuters) - Japan's output gap, a measure of the balance of supply and demand in the economy, was revised up to plus 0.9 percent in the first three months of 2007, a research report showed on Monday, suggesting that the nation is shaking off years of deflation.

The figure was the highest since January-March 1992 when it was plus 1.2 percent, said Yasuhiro Ouchi, an economic researcher at the Cabinet Office, who compiled the report.

It compared with an initial reading of plus 0.7 percent thanks to an upward revision to the first quarter's gross domestic product (GDP) data released last Monday.

A positive output gap means there is more demand than supply in the economy, which increases inflationary pressure.

"The assessment has not changed that the output gap is improving," Ouchi said.

But the government has not yet declared Japan has completely beaten deflation, citing a possibility that the economy may fall into the situation in which prices fall persistently.

The latest output gap figure followed plus 0.5 percent in the final quarter of last year, marking the first second-straight quarter of a positive reading since October-December 1996/January-March 1997.

To calculate the output gap, the Cabinet Office estimated 1.5 percent annualised growth as Japan's potential growth in January-March.

The output gap shows how much gross domestic product (GDP) has deviated from "potential GDP", or the volume of activity when the economy is running at full capacity.

Central banks see the output gap as an important variable for determining monetary policy as they try to balance growth, employment and inflation by tweaking interest rates.

The Bank of Japan has been saying that Japan's output gap continues to be in excess of demand, keeping consumer prices in an uptrend in the long run, although core inflation will likely be flat in the near term.

Data showed last Monday that the world's second-largest economy grew a real price-adjusted 0.8 percent, or 3.3 percent annualised in the first quarter, up from an initial reading of 0.6 percent and 2.4 percent annualised, thanks to robust capital spending.