While there is good reason to be concerned about the state of Japan's economy, analysts wrongly target deflation as the main villain in this tale. Contrary to received wisdom, Japan's economic slump is not the result of price deflation. Nor are aggressive expansions of fiscal and monetary policies the best response to these conditions. Indeed, relying on just these measures in the past is at the heart of Japan's chronic economic slowdown.

Actually, several points can be raised in defense of deflation. And it is a result rather than a cause of current economic conditions.

By any reckoning, Japan's economy is under-performing. For example, capital spending, a harbinger of future business activity, was down by 14.5 percent in the last quarter of 2001. Similarly, year-on-year machine tool orders fell by over 40 percent in January after a similar decline in the previous month. And year-on-year bank lending is down nearly 5 percent in January after falling by just over 4 percent in December, the 49th consecutive monthly decline. Meanwhile, Japan's consumer price index declined by 0.7 percent in 2001, its third consecutive annual decline.