Japan has achieved a sustained expansion as the economy has largely overcome its post-bubble problems. Robust output growth is projected to continue through 2007, at a rate of between 2 and 3%, thanks to strong domestic demand underpinned by rising corporate profits and a reversal of the declining trend in employment and wages. The strength and duration of the upturn is expected to reduce the unemployment rate to around 3½ per cent and bring a definitive end to deflation, with the underlying inflation rate approaching 1% by the end of the 2007. The Bank of Japan should keep its short-term policy interest rate at zero until inflation is sufficiently high so as to make the risk of renewed deflation negligible. The lower limit of the 0 to 2% inflation range that was announced by the Bank in March 2006 should be increased. The medium-term fiscal plan should aim at a primary budget surplus large enough to stabilise the public debt-to-GDP ratio by the early 2010s, based on a more detailed package of spending and tax measures. Ensuring rising living standards in the face of accelerated population ageing requires effective regulatory reform to ensure strong competition and measures to improve the national innovation system.