Japan central bank cuts key rate to 0.1 percent

The Bank of Japan also introduced new steps to thaw a growing credit crunch for companies.

The cut was widely expected and comes after the government earlier in the day lowered its economic forecast for the fiscal year through March to negative 0.8 percent from positive 1.3 percent.

The Bank of Japan's policy board voted 7-1 to cut the uncollateralized overnight call rate target from 0.3 percent. It was the second cut in less than two months. Japan's interest rates have gone lower--they were effectively at zero from 2001 to 2006.

The bank said it plans to start buying commercial paper--the short-term debt firms use to pay everyday expenses--in an effort to funnel cash directly to firms and will increase its purchases of government bonds to 1.4 trillion yen ($15.7 billion) per month from 1.2 trillion yen ($13.4 billion).

Expectations for a rate cut jumped following the U.S. Federal Reserve's move earlier this week to reduce its benchmark rate to a range of zero to 0.25 percent--the lowest level on record.

But since then, the yen hit 13-year highs against the dollar, heightening concerns about the strengthening yen, which erodes exporters' foreign income. On Wednesday in New York, the dollar fell to 87.11 yen, its weakest level since July 1995.

Bank of Japan Gov. Shirakawa said recent foreign exchange fluctuations factored into Friday's rate cut.

"A stronger yen affects the economy in multiple ways," he said. "But our decision was not based solely on the yen. Rather, we focused on the overall economic picture."

The Japanese currency's dramatic surge this week has triggered strong language on the political front, with government officials dropping hints at possible intervention to limit the yen's climb and protect Japanese exporters.