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After a sharp contraction in the wake of the Great East Japan Earthquake in March 2011, the economy began to rebound in May 2011. Public and private reconstruction spending will drive the recovery through mid-2012, with growth of 2% for the year. As public reconstruction outlays wane, the expansion will be supported through 2013 by a pick-up in export growth that improves labour market conditions and boosts private consumption. Given the large output gap, deflationary pressures are likely to continue through 2013, with the unemployment rate remaining above its pre-2008 crisis level.
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