Prime Minister Junichiro Koizumi faces mounting difficulties as he tries to keep his reform initiative alive. His problem, in a nutshell, is that events are overtaking him. The gap between rhetoric and reality is widening amid growing signs of deflation. His favorite slogan, "structural reforms with no sacred cows," is beginning to sound increasingly hollow. It is difficult to escape the impression that he is being forced to shift his reform policy.

This is evident in the way the Koizumi administration is trying to fight deflation. An antideflationary package in the works focuses on accelerating banks' bad-loan writeoffs, expanding outright bond purchases by the Bank of Japan and easing the credit crunch in the small-business sector. While these steps are necessary, one wonders whether the government is trying to revive the economy in the name of "counter-deflation measures."

Deflation is a serious problem. Falling prices with lower output reduce sales and incomes, throwing more companies out of business and more people out of work. This discourages consumer spending, leading to further deterioration in the economy. The trend, if not reversed, could touch off a deflationary spiral with dire implications for the global economy as well.