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Japan output gap widens in blow to BOJ inflation target

[TOKYO] Japan's output gap widened in July-September as the economy slipped into recession, the Cabinet Office said on Thursday, highlighting the difficulty the Bank of Japan faces in guiding inflation to a 2 per cent target.

The output gap was minus 2.7 per cent in the third quarter, more than minus 2.2 per cent in the previous quarter, the Cabinet Office said.

A negative output gap - or the difference between actual and potential gross domestic product - suggests that output is less than what the country can produce at full capacity, which is a sign of weak demand and deflationary pressure.

The BOJ stunned investors on Oct 31 by expanding its government debt and risk asset purchases after a decline in oil prices threatened its goal to guide inflation to around 2 per cent by some time in fiscal 2015.

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However, many economists say the BOJ will miss its target because oil prices have fallen further and consumer spending has been very slow to recover from a sales tax increase in April.

The tax increase, along with weak business spending, helped push Japan into recession in the middle of this year.