Following the recent acceleration of growth, led by business investment and exports, activity is likely to be sustained by faster world trade growth. However, the upturn, which is concentrated in certain manufacturing industries, is unlikely to be strong enough either to reduce unemployment significantly or to end deflation. The pressure for a rise in the yen and the strains associated with rising public debt pose risks to a durable expansion. Monetary policy should continue to focus on ending deflation by enhancing the effectiveness of quantitative easing. This should remain in place until positive inflation is achieved on a sustained basis and the risk of deflation is negligible. Putting the structural budget deficit on a downward path in 2004 would boost confidence in the prospects for consolidation over the medium term. Financial-sector restructuring, including the reduction of non-performing loans, should be a priority, accompanied by a broad structural reform programme to revitalise business activity...