The economic expansion remains on track, though at a more moderate pace as a result of a slowdown in export growth. The resilience of domestic demand, reflecting the increased profitability of the corporate sector and employment gains, should help sustain growth at an annual rate of around 2¼ per cent through 2005 and 2006. The expansion, the strongest since the 1980s, is expected to bring an end to deflation, as measured by the consumer price index, in the course of 2005. The Bank of Japan’s policy of quantitative easing and zero interest rates should continue until inflation is sufficiently high to make the risk of renewed deflation negligible. A detailed and credible consolidation plan to achieve the government’s goal of a primary budget surplus by the early 2010s is necessary for confidence in fiscal sustainability. Further progress in reforming the banking sector is important to sustain the recovery and should be accompanied by an acceleration of a broad structural reform programme to increase productivity. ...