A sense of frustration is beginning to set in. Every indication points to a marked deterioration in economic outlook in the months ahead.

As the likelihood of a swift rebound in the U.S. economy fades away, a series of sharp profit drops announced by major Japanese manufacturers in the IT sector has visibly shaken the stock market. Inventory adjustment is more severe than it was expected to be just months ago, and unemployment has finally risen beyond 5 percent.

Meanwhile, Prime Minister Junichiro Koizumi has made it known that he will not convene the Diet until the end of the month. In fact, he took a summer vacation and is scheduled to make an overseas trip to the neighboring Asian countries later this month.

The prime minister has remained rather quiet, while politicians and bureaucrats are floating various policy ideas, many of which often contradict each other.

In short, the market seems to be asking the following questions: Is there a proper sense of urgency here now that the economy is in danger of taking a serious downturn? Or are we witnessing the first signs of erosion in the prime minister's leadership as the politicians and bureaucrats in his Liberal Democratic Party reclaim their grip on the compilation of the national reform agenda?"

There are several possible interpretations. The first favors the prime minister. It indeed takes time to elaborate upon action plans for a structural reform that is as wide-ranging as the prime minister's. As a matter of practice, there is no alternative but to rely on bureaucrats for that task. What is critical is for the leader to have the resolve needed to avoid compromising on his principles. Skepticism will dissipate quickly enough once his action plans are spelled out by the legislature. True, there is wide support among private-sector economists for the substance of the prime minister's reform initiative.

It is essentially a public-sector reform effort. It intends to make the public sector lean and efficient to reinvigorate private-sector businesses. It goes beyond the wholesale allocation of budgets and seeks to scrap the Fiscal Investment and Loan Program, the giant slush fund that famously finances a wide range of inefficient public enterprises.

The initiative also aims to use taxpayers' money more effectively to enhance the nation's investment environment. One may diagnose Japan's failure as caused by a lack of governance not only at the governmental level, but also at the institutional level.

While this is partly true, I want to stress the fact that the problem is most serious at public institutions, which are not subject to any market discipline.

It is not exaggerating by much to claim that our incessant expansion of public institutions has ended up choking off private-sector dynamism.

In this respect, I firmly believe the prime minister is formulating his structural policies just right. But the market remains skeptical. Some critics are questioning the prime minister's ability to overcome resistance against his reform initiative.

Although he secured a clear mandate for his plan by leading the LDP to victory in the recent Upper House election, it could be watered down at any point by meddling politicians and bureaucrats.

I think this possible but rather unlikely, for he would gain nothing by retreating from reform. In fact, a retreat would likely ruin his political career.

The market's anxiety also seems to derive from the suspicion the prime minister intends to see the reforms through come hell or high water. Under this scenario, the prime minister is insensitive to the warning signals the markets are sending out. He single-handedly puts his priority on structural reform. A dilemma then arises from the fact that structural reform is always both a short-term negative and a long-term positive. Therefore, the rapid reform aggravates a recession.

In any event, a responsible government would avoid plunging into a painful recession. Moreover, it is quite possible that a recession could sabotage the reform effort by exacerbating the short-term negatives to an unbearable point.

In short, the prime minister is a man of principle but may lack the experience to competently manage the economy.

I agree that the short-term negatives of reform present an intricate problem, but I doubt they make a case for shelving reform. My view is that the government should do so only when an economic and financial crisis becomes imminent. On such an occasion, the government should concentrate upon crisis management, as the late Prime Minister Keizo Obuchi just did. In my judgment, the current state of the nation's nonperforming loans is much less serious than it was in 1997 and 1998. To put it another way, the problem is now manageable in terms of its size and nature.

The prime minister shouldn't be afraid of risking a financial market collapse as long as the problem is properly addressed. But what cannot be overstated is that a demonstration of his decisiveness is critical to securing the confidence of the international investment community, which remains deeply skeptical.

Here, my alarm bell starts to go off. The Koizumi Cabinet is clumsy; his ministers are not playing their tune in unison. Nor are they particularly skillful orators when it comes to discussing their areas of responsibility. Unfortunately for the public, the prime minister cannot speak specifically on every issue.

As a result, the policy focus missing from the various ministers' piecemeal remarks has become obvious and is beginning to breed some harmful confusion in the market.

I believe that this state of disarray must be cleaned up.

First, the ministers should discourage people from harboring inflated expectations of the supplementary budget. In other words, they should state clearly that there will be no deviation from structural reform even if the economy stagnates further, unless another crisis becomes imminent. Legislative initiatives in the seven priority areas laid out on the Koizumi blueprint in June should be accelerated to convince private-sector businesses that their frontiers will soon expand. Evidently, budget reallocation alone can't accomplish the task.

Second, the ministers should make it clear they will abandon any attempt to prop up stock and bond prices. In most cases, propping only results in giving speculators more opportunities to sell off. At the same time, the guidelines for dealing with NPL problems and the concurrent corporate restructuring should be promptly worked out.

Third, the ministers should stop exaggerating their expectations of monetary policy. Instead, I would even propose the government discuss moving to a weak-yen policy. That could keep the yen from excessively appreciating, even if it falls short of actual market intervention. If this is not pursued, the currently overvalued yen, disinflation and the hollowing out of national industries are likely to persist. The prime minister is indeed a great communicator with the public at large. But it is also known he has long been a loner who lacks loyal lieutenants who can take care of the details for him.

What is now in question is the collective ability of the Cabinet to communicate well with and gain the confidence of the markets. Good coordination and well-orchestrated eloquence are the keys to success.

The next couple of months could be make-or-break ones for the prime minister.