The central bank also said it will cut the Lombard rate to 0.50 from 0.75 per cent, and start paying interest on commercial banks' excess reserves held on account as one way to continue easing strains in the money market.

The bank's economic outlook report is expected to released later today, followed by comments from Shirakawa.

The move, representing a major change in monetary policy, comes on the heels of the $275bn economic stimulus package unveiled by Taro Aso, the Japanese prime minister, on Thursday.
 
The package provides about 38,000 yen ($387) in benefits to each household or about $20bn overall for the country.

It also guarantees expanded loans and credits to small and mid-sized firms, tax-exempt housing loans to shore up the property market, and even includes the reduction of highway tolls. 

"The package aims to generate solid economic growth by steady domestic demand," Aso said.

'Harsh storm'

He called the global financial crisis a "harsh storm seen only once in 100 years", adding that "under such circumstances, I am certain that what is most important is to remove uncertainties from the lives of the people."

Earlier this week Kiyohiko Nishimura, the BOJ deputy governor, said there was a risk that the worsening global market and economic conditions could affect Japan's economy.

"Downside risks for the economy are heightening," he told parliament. "When financial market tension is high as it is now, the most important contribution a central bank can make is to ensure stability in markets through liquidity provision."

The rate cut is a major change in BOJ policy. Aside from pressure to co-ordinate with other central banks to address the global economic crisis, the BOJ believes that the move is necessary to rein in a soaring Japanese yen that has hurt export-dependent Japanese companies.

Volatile markets

Japan's Nikkei stock average closed down 5.01 per cent on Friday.

 

Investors appeared to be taking profit after three days of strong gains.

Monday is a holiday in Japan, and Japanese investors were also nervous about holding positions over an extended weekend, given recent volatile moves overseas.

Several other Asian markets were also lower on Friday, with Hong Kong's Hang Seng down more than three per cent and China and Australia also down while share prices in South Korea and Singapore were just in positive territory.

India's benchmark Sensex index, however, surged 8.3 per cent in early trading as traders caught up with Thursday's sharp rally in global markets. The Sensex rose 740.42 points, or 8.3 per cent, to 9,794.93 in early trading.