Fiscal stimulus is expected to lift output growth into positive territory from the second half of 2009, although at a rate that remains below 1% through 2010.
The Bank of Japan should fight deflation through a strong commitment to implement effective quantitative measures until underlying inflation is firmly positive. The fiscal stimulus packages are helping to cushion the downturn. However, it will be important to focus on fiscal consolidation as the economy stabilises, given the large budget deficit and high public debt ratio. Reform of the tax and social insurance systems, accompanied by structural reforms, particularly in the service sector, remain priorities to improve living standards in the face of a shrinking working-age population.
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©OECD Observer No 274, July 2009