Economic Outlook Revised Down. The government has revised down its assessment of the economic outlook for the second consecutive month in March in its monthly economic report. In the February report, the government was reading the economy as still recovering modestly though more slowly. However in the March report, the expression used was downgraded to one that "the economic recovery is seen to be stalling." The main reasons for the downgrading were a weaker assessment of the current US production activity, as well as the recognition of signs of a domestic capital investment slowdown and weakening labor market conditions. One of the important points of the March report was that it officially recognized the fact that the Japanese economy is currently in mild deflation. With the government taking this view about prices, the BoJ will be obliged to address the deflation issue by taking further easing measures next Monday (for details, see the following section under "Look At the Day Ahead.") Capex Plans Reported Down. According to Nikkei’s final capital investment survey, FY2001 initial capital investment plans are down by 4.8% compared with the projected FY2000 actual investment growth of 4.5% for all industries excluding financial institutions. For the manufacturing sector, the initial FY2001 plans are down by 4.1% compared with the projected 9.6% growth for FY2000, and for the nonmanufacturing sector, the initial FY2001 plans are -6.9%, compared with 0.9% projected for FY2000. Large planned cuts in capital expenditures of electric supply companies and semiconductor makers are especially notable. These results are in line with our general view that the capital investment will likely weaken substantially during the first half of FY2001, but during the second half, it is expected to turn up gradually, as signs of a US economic recovery are confirmed. ZIRP Expected Back. A return to Zero Interest-Rate Policy is expected next week, with some quantitative-easing measures possibly announced in addition at the BoJ Policy Board meeting on Monday. Since our mid-January view change, we have been expecting the BoJ to ease monetary policy, including quantitative easing measures, sometime between February and March as our baseline scenario. Today, the Cabinet Office released its March economic report, in which the government officially acknowledged that the Japanese economy is currently in mild deflation. Now that deflation is the government’s official assessment, the BoJ will almost certainly take action on Monday to address the issue. It is likely that the Bank will at least adopt a return to the zero interest-rate policy (ZIRP), but on the back of highly unstable global equity markets over the last few days, additional quantitative-easing measures are a possibility as well. As for possible quantitative easing measures, we have recently analyzed the implementation and effects of monetary base growth targeting. However, other conceivable alternatives include the lowering of bank reserve ratios and a simple announcement of an amount of outright JGB purchases to be increased. While there is debate about the extent to which the monetary base is a policy instrument that the BoJ can still control, changes inthe reserve ratios and the amount of outright JGB purchases are more direct control instruments, and therefore, the Bank may opt for these alternatives just to initiate quantitative-easing measures. At any rate, with long-term interest rates being so low already, a return to ZIRP would not necessarily solve the deflation problem, and additional quantitative measures are needed to boost activity beyond the effects possible through the shrinking interest-rate channel.