The Bank of Japan on Friday reduced its benchmark interest rate from 0.3 to 0.1 per cent to stem the effects of the recession that has hit the world's second-largest economy, reported dpa.
In announcing its decision, the central bank also turned more pessimistic about Japan's economic outlook, referring for the first time to a "worsening" of the economy. In November, it still talked about "sluggish" growth.
The bank's fiscal policy council also proposed to buy commercial short-term bearer bonds to help companies fund their businesses.
The rate reduction had been expected after the US Federal Reserve this week lowered its key interest rate to a record low, from 1 per cent to a range of 0 to 0.25 per cent. The yen shot to a 13-year-high against the dollar as a result of the Fed's rate cut.
The Bank of Japan had been under pressure from the government to stimulate the contracting economy by pumping more money into financial markets to ease a credit crunch and to prevent a further rise in the rapidly appreciating yen.
The stronger yen has been hurting Japanese exporters because it makes their goods more expensive abroad and lowers their overseas earnings.
But there were doubts within Japan's central bank that the latest reduction would have much effect after the bank lowered its overnight lending rate from 0.5 to 0.3 per cent in October, media reports said.
The bank's policy board voted 7-1 for the further reduction, bringing its key rate close to its near-0-per-cent rate during Japan's economic crisis of the 1990s.