The Japanese economy is expected to grow at a faster 2.9 percent in 2022 after a moderate 1.7 percent recovery in 2021, reflecting pent-up private consumption and business investment.

The economy is confronted with several near-term risks, including the recurrence of COVID-19 infections and supply chain disruptions. Structural challenges include weakening fiscal discipline, side effects from prolonged monetary easing, the declining profitability of regional banks, and demographic drag from population aging and low fertility rates.

To secure sustainable post-pandemic growth, fiscal policy should remain supportive of the economy in the short term, with targeted measures to hard-hit sectors, backed by a credible medium-term fiscal consolidation plan to ensure long-term fiscal sustainability. The easy monetary policy stance should be maintained to support growth and counter deflationary pressures, while comprehensive structural reforms should be quickened to address long-term challenges.