Japan’s recovery from the severe 2008-09 recession was led by exports and fiscal stimulus. After stalling in late 2010, the expansion appeared back on track in early 2011, thanks to renewed export growth and improving labour market conditions, when Japan was hit by the Great East Japan Earthquake, the worst disaster in its post-war history. The earthquake and the accompanying tsunami led to an enormous loss of human life, as well as extensive damage to the physical capital stock that amounts to between 3.3% and 5.2% of GDP according to the government’s preliminary estimate. The negative short-term impact of the disaster on economic activity is likely to be reversed later as reconstruction efforts boost private and public investment. The Bank of Japan should maintain an accommodative monetary policy stance until deflation is overcome. In addition, the monetary policy framework could be improved by raising the inflation range that is considered consistent with price stability. While monetary policy has a major role to play in sustaining the economic expansion during the period of fiscal consolidation ahead, output growth depends mainly on structural reforms to boost labour productivity and inputs.