Lateral flexion. Also, start out with smaller circles and use lots of leg with a more open hand.. but keep the hand pulled back out towards your hip.
For lateral flexion, don't give up. My mare's first attempt was us going around in a tiny circle for a good five minutes before she finally got the idea. Try doing it ten times for each side. Ask slowly but give immediately. I noticed a difference within a couple days.
When you're circling, wait to see the neck muscles contract, then release and change direction.
Start small!! You can't expect your horse to have perfect flexion immediately. Start with circle work and get him so that you can see a piece of his inside eye. Hold his head there with the inside rein, while making sure he doesn't fall in with your inside leg, and wait until he relaxes and then give to him so that he can travel straight again. Repeat this again and again within all the gaits until he can do it comfortably. Don't ask too much at first or else he and you will get frustrated...just take your time. Also work on counter-flexion, this helps loosen the neck so that he will be able to bend easier.
Never hold him in this position...think about it. If someone was forcing you to hold your head in a slightly unnatural way you could not relax. If you couldn't relax then you would not want to hold your head there. Instead if they ask and then release and then re-position then release and re-position you are going to be able to relax which will make it an easier task.