The top priority at present is to achieve a sustained economic recovery. However, a credible fiscal consolidation plan is important to maintain public confidence in Japan’s fiscal sustainability as the budget deficit is set to approach 10% of GDP in 2010 and gross public debt nears 200%. Although the goal of a primary budget surplus by FY 2011 is no longer feasible, the government should move promptly once a recovery is in place to implement tax increases and spending reductions, notably in public investment and government wages. While the plan of the previous government to allocate all consumption tax revenue to social security may make it politically easier to raise the consumption tax rate, it could also limit flexibility in spending. A broad-based tax reform, including improvements in direct taxes, is essential to boost revenue and support growth, which is also important to reduce the public debt ratio.