Japan's consumer price index dropped 0.3% in 1999 from a year earlier and then 0.4% in 2000, government statistics show. A Cabinet Office official said it was the first time since the end of World War II that prices dropped for two years in a row.

The Cabinet Office said in its latest monthly report on the economy that the Japanese economy is in a state of mild deflation. It has decided to define deflation as "a state in which prices keep on falling," deviating from Japan's official definition of deflation as "a state in which prices are falling while the economy is receding."

The news follows comments by several Japanese legislators on Thursday to shore up eroding confidence in the nation's financial industry and a move by one big banking group, UFJ Holdings, to clean up its bad-loan debt.

In the March report, the government downgraded its overall economicevaluation for the second consecutive month, saying the nation's economic recovery appears to be stalling due to weak productivity stemming from the U.S. economic slowdown. The Cabinet Office said, "Economic recovery appears to be pausing." The report said, however, that the economy's move toward a self-sustaining recovery is intact due to sound corporate earnings and capital spending.

The government last used the term "pausing" in January 1998, and it was the first time since September 1998 that the government revised down its assessment for a second straight month.

The jobless rate has stayed at a record level, and the trend of increasing job offers is stalling, but the Cabinet Office left unchanged its assessment of personal consumption, which is a key to a full-fledged economic recovery.

Report Steps Up Pressure on BOJ to Cut Rates The report significantly increased pressure on the Bank of Japan to consider powerful remedies when its policy board meets Monday.

The BOJ was expected to cut a key interest rate to zero, taking back its first rate increase in a decade, which came just seven months ago. Many in government would welcome the cut, but trimming the overnight call rate target to zero from 0.15% now won't satisfy a vocal contingent of senior policy makers calling for more aggressive action.

"The BOJ needs to take a drastic steps and increase its outright purchases of Japanese government bonds to increase funds at financial institutions," ruling party policy chief Shizuka Kamei told the central bank Friday.

BOJ Governor Masaru Hayami responded, at a meeting of government and political leaders, that the central bank "will carefully consider whether more steps are needed" at Monday's policy meeting.

The Nikkei 225 average added 80.15 to close at 12232.98 on Friday, but the market lost a total of 3.1% this week - at one point crashing to its lowest levels since 1984. This raised concerns about the health of Japan's wobbly banks and caused the government to set up an emergency panel to find solutions. Slowing global growth is also taking the wind out of Japanese exports, causing manufacturers to slash output.

Economic conditions have continued to worsen even though the BOJ eased credit at its previous two policy board meetings. Critics say nudging the call rate target back to zero would do little to stem the deterioration.

Recent remarks by Mr. Hayami suggested the BOJ isn't likely to buy more government debt or adopt inflation targets. But local media speculated Friday the central bank might consider other "quantitative easing" measures, such as setting a growth-rate target for the balance of current accounts held at the BOJ by private-sector financial institutions.

An important job for the BOJ Monday is to take action to calm frayed nerves in the markets, said former BOJ deputy governor Toshihiko Fukui, who is widely considered a leading candidate to replace Mr. Hayami eventually.

The Wall Street Journal The economy has been flashing danger signals and could be heading for another crisis unless the central bank comes up with meaningful steps. Industrial production plummeted 4.2% in January from the previous month, the sharpest fall since January 1995. Core consumer prices in the Tokyo area, a leading indicator for price movements in the rest of the country, dropped 1.1% in February from a year earlier, the biggest decline on record. Slowing output is certain to deal a blow to profitability in the manufacturing sector and undermine business investment - practically the only source of private-sector growth. Machinery orders plunged 11.8% in January, indicating business investment will slow later this year.