Junichiro Koizumi was Japan's first prime minister to receive a mandate to push structural reforms by convincing the public that there would be no economic growth without painful reforms. It remains to be seen, however, whether Koizumi will succeed in his reforms. More than a year after launching his administration, it is still unclear how Koizumi will spur economic recovery, as he depends, in running the government, on the ruling Liberal Democratic Party's major factions, which often resist his reform efforts. This makes public support of his government fragile.

The current economic stagnation stems from insufficient private demand to drive the economy. Without public works spending, which accounts for about 8 percent of the gross domestic product, the economy would collapse. This is the basic cause of Japan's fiscal crisis. Therefore, structural reforms should aim at creating private demand to make up for the necessary cuts in fiscal spending. This is the only way to achieve self-sustaining economic growth and fiscal health.

The "recovery-or-reform" debate concerns ways of ending deflation -- traditional fiscal spending or structural reforms for creating private demand. The latter is the only alternative for Japan, which has used up all its monetary and fiscal policy options. This is the lesson that Japan should have learned after wasting a decade in implementing stopgap fiscal spending to delay reforms.