In yet another move to roll back deflationary pressures, the Bank of Japan on Monday decided to increase the money supply and bring the key overnight money-market rate back to zero. The decision, which follows a round of marginal interest-rate cuts in February, indicates that the central bank is pulling out all stops to prevent the economy from slipping into a vicious cycle of falling prices and declining output.

In recent weeks, Japan's economy has has been showing clear signs of going from bad to worse, with the Nikkei stock average dropping below 12,000 points to its lowest level in 16 years. U.S. officials have expressed concern that a fresh bout of recession in Japan, coupled with a sharp slowdown in the United States, could even undermine the security alliance between the world's two largest economies.

The BOJ, which is explicitly committed to price stability, is more cautious about easing credit than tightening it. That is why the central bank raised the money-market rate from zero last August, overriding objections from the government. Then, the bank said that "deflationary expectations are beginning to disappear." With hindsight, that judgment was premature. Now it has reversed itself and acknowledged that the economy is "deteriorating again, rather than entering on the path of sustainable growth, despite the fiscal and monetary stimulus measures that have been taken over the past decade."