There are episodes in history that deservingly draw our attention--some very small in scale, but major in impact. In U.S. history, one such moment at the start of the Revolutionary War has come to be known as "the shot heard round the world."

Another such momentous event recently appeared in Japan, which wrecked by a decadelong economic malaise and the potential threat of a financial implosion, saw the Nikkei Stock Average rise on a day that it should have plummeted.

After the tragic Sept. 11 terrorist attack on the United States, Tokyo's stock index rose, baffling those who noticed and were not otherwise glued to the visual images of airplanes crashing into skyscrapers.

Why did the Nikkei move up? What could explain the breath of life in an otherwise flat and dreadfully stale Japanese economy?

Prime Minister Junichiro Koizumi and his colleagues of the Liberal Democratic Party should have called a Diet hearing to investigate. Or perhaps the prime minister's economic policy czar, Heizo Takenaka, should have attempted some explanation as to why Japan's stock index seemed to power past the shock of the day's earlier traumatic events.

What triggered this shiver of hope was the bankruptcy of Japan's third-largest retailer, Mycal Corp. Rather than prolonging by sleight of hand its insolvency, Mycal forced a real and transparent reconciliation of its deteriorating assets and accumulating debts.

In contrast to the life support that the government and several lead banks continue to apply to Daiei Inc., Mycal's action earned the applause and support of markets. This is the shot that should ring loudly through the halls of Nagatacho and Kasumigaseki, and frankly, throughout Japan.

However, Koizumi, despite his slick veneer as a reformer and rhetoric that he would protect "no sacred cows," has thus far utterly failed to make market forces his friend in changing the course of the nation's economy.

Many who interact closely with the prime minister report that though he has one of the keenest political minds in contemporary Japanese history, he is not very "numerate." He does not follow numbers and does not really understand the dynamics of an economy.

As but one example, misunderstanding his advisers, Koizumi originally told the nation he had a three-year plan for disposing of the country's nonperforming loan (NPL) problems.

But he later revised this to seven years after being corrected by his NPL disposer-in-chief Hakuo Yanagisawa, state minister in charge of financial policy.

Nonetheless, the positive shock generated by Mycal's bankruptcy was not lost on all of the prime minister's close advisers--particularly Hideichi Okada, a personal aide drawn from the senior ranks of the Economy, Trade and Industry Ministry.

Okada gave Koizumi access to a couple of clever economic realists from both the Diet and the private accounting sector who convinced the prime minister that economic confidence could be significantly strengthened if the lessons of Mycal's bankruptcy were applied to Japan's major borrowers. Koizumi was on their side for at least two days before changing course again.

Focusing on the worst NPL cases would require the government to abandon the command economy tactics advocated by Yanagisawa. His current approach is to generate a total figure of nonperfoming loans, divide that number by seven (for seven years), and then write one-seventh of the nation's bad debt off each year.

In the meantime, to better calibrate and understand the full scale of the problem in the domestic financial sector, Yanagisawa is playing the role of a good bureaucratic chief--asking for an expansion of his budget, a broadening of his powers and a massive expansion of his inspection team.

At best, however, Yanagisawa's plan is disingenuous and a distraction from real problem-solving as it fails to account for the ongoing accumulation and compounding of bad loans beyond current levels.

His plan also rests on the notion of informally dispersing bad debt target levels--to the domestic financial sector--allowing them only to write off a certain limit of NPLs each year.

In other words, Yanagisawa has constructed a framework in which the government will essentially be directing banks to write off some loans, but then to misclassify other parts of its portfolio until the next year's bad-debt targets are dispersed and approved.

Very few seem to be noting that Yanagisawa seems to be putting the government in the position of being a party to the ongoing fraudulent management of loan portfolios.

The beauty of the Mycal bankruptcy and the so-called 30 Worst NPLs Plan is that the government and private sector can acknowledge that the resolution of the nation's debt problems will take years to resolve, but that this strategy will clear the worst cases off the books first.

Markets rise and fall based not on current conditions, but on future projections. If the nation steps forward to work out the most bleak parts of its bad-debt portfolio, markets may believe that this bodes well for sound economic decisions in the future.

Yanagisawa's annual allotments of bad-debt write-offs also could be overwhelmed by other unforeseen, unmanaged bankruptcies, compelling even more strident government guidance to the banks that are dishonest about the true state of their loan portfolios.

Just as markets can spiral down, triggering further cascading spirals downward, they also can spiral upward. If the nation worked harder to get market forces on the side of reform, stopped trying to convince the world that the nonperforming loans will disappear by some unrealistic date, and worked to resolve the worst cases first, confidence might return on the basis of a brighter future down the road.

Such a boost would stir new investment, drive consumption and potentially kick-start the economy, thus bestowing on those at the helm of state the deserved accolades as "reformers."