The economic expansion gained momentum in late 2003, thanks to an acceleration of business investment and exports and some strengthening of private consumption. The pick-up in world trade and steady increases in domestic demand, buoyed by some improvement in the labour market, are expected to help sustain growth near 3 per cent through 2005. Such growth would make this Japan’s longest upturn since the 1980s and help bring deflation to an end. However, the economy faces significant headwinds from the continued fall in land prices and bank lending. Monetary policy should continue the quantitative easing strategy until positive inflation is achieved on a sustained basis and the risk of deflation becomes negligible. While the expected decline in the budget deficit in 2004 and 2005 is welcome, a more ambitious medium-term approach is needed to reach the government’s target of a primary budget surplus by the early 2010s. Progress in reducing the non-performing loan ratio of the major banks should be continued, accompanied by an acceleration of a broad structural reform programme to revitalise business activity...