Japan cut interest rates for the first time in seven years on Friday and warned severe conditions in the global economy could persist, as more central banks shift from stabilising credit markets to slashing borrowing costs in the face of the worst crisis since the Great Depression.
However, the rate reduction was a close call at the Bank of Japan and was not as big as many had expected, sending a mixed message to financial markets.
Japan's Nikkei share average fell 5%, making its drop in October a record 24%.
Policy makers have been struggling to find the right response to a rapid slowdown in the global economy that has hurt corporate profits and which sparked a record freefall in global stock markets in October.
Companies world wide have reported job cuts, warned of falling profits and battered balance sheets in what Japanese Prime Minister Taro Aso described as a "harsh storm seen only once in 100 years".
The Bank of Japan cut its benchmark overnight call rate to 0.30% from 0.50%, a slightly smaller reduction that the quarter percentage point many had expected. A 4-4 vote on the policy board meant the central bank governor had to cast the deciding vote.
Underlining the corporate gloom, Mizuho Financial Group became the second major Japanese bank this week to cut its full-year net profit forecast by more than half because of bad loans and losses in its equity portfolio.
Friday's rate reduction is the latest in a series of interest rate cuts globally as central banks move rapidly to try to cushion growth now that interbank lending rates have been consistently falling.
The average benchmark interest rate in the Group of Seven countries has dropped to 2.36%, the lowest since April 2005, from 4% in August 2007 when credit markets began imploding because of mounting subprime mortgage defaults in the US.
Economists widely expected Australia, Britain and the euro zone to cut interest rates next week.
The economies of Britain, Europe, Japan and the United States are contracting. The latest growth data showed the US economy shrank in the third quarter, three months that ended with the dismantling of Wall Street in September.
Signs of hope
Despite the potential for higher unemployment and softer consumer spending around the world, there were some signs rate cuts from China to the US and massive doses of liquidity were unlocking short-term financing for banks and improving investor sentiment.
A top Australian policy maker on Friday said the Federal Reserve's massive expansion of US dollar swaps with other central banks, including New Zealand's Reserve Bank, seemed to be working to ease pressures in global markets.
The efforts also showed some signs of relieving panicked investors. The MSCI all-country world equities index is set for its biggest weekly rise since the gauge started 20 years ago.
China reduced its benchmark rate for the third time in two months earlier this week and the US Federal Reserve eased its rate on Wednesday to the lowest level since June 2004.
Along with central banks, governments around the world were waging an all-out battle to contain the fallout from the financial crisis, including by cutting taxes, taking equity stakes in banks and backing bank deposits.
On Thursday, Japan unveiled a $US50 billion economic stimulus package and German cabinet minister Michael Glos said the European country planned to introduce a range of steps worth up to $US39 billion.