With economic activity picking up,  6  BIS central bankers’ speeches  the output gap – that is, the difference between aggregate supply capacity and aggregate demand – has recently been narrowing. Nevertheless, aggregate demand continues to fall short of aggregate supply capacity by about 2 percent.
While price developments are subject to various factors, including developments in international commodity prices, in order for Japan’s economy to overcome deflation it is important to address the problem of insufficient demand, which is the key factor underlying deflation in Japan.