A further recovery in domestic demand, led by private consumption, is projected to boost economic growth to around 5% in 2006-07. Export growth is also picking up, led by exports to China, despite the significant appreciation of the won during the past 18 months. The stronger currency will help contain inflation within the central bank’s medium-term target zone. Monetary policy should focus on the medium-term inflation target, while concerns about rising housing prices in some regions should be addressed through tax measures and policies to increase supply. With domestic demand accelerating, fiscal policy should aim at the medium-term objective of a balanced budget by 2009. Regulatory reform, including greater labour market flexibility, is needed to improve the environment for business investment.