Japan has overcome many of the structural problems that hindered growth during the decade following the collapse of the asset price bubble in the early 1990s, helping it to achieve a sustained expansion led by domestic demand. Although robust economic growth is projected to continue through 2007, Japan must address a number of problems to sustain the expansion over the medium term. This chapter identifies five key challenges: i) ensuring a definitive end to deflation under a new monetary policy framework; ii) achieving fiscal consolidation in the context of high public debt and rapid population ageing; iii) addressing rising income inequality and poverty while reducing government spending; iv) boosting productivity growth by upgrading the innovation system, focusing on the R&D framework, product market competition and the education system; and v) strengthening the integration of Japan in the world economy to benefit more fully from globalisation.