TOKYO - Japan's central bank said Friday it was cutting its key interest rate by 20 basis points to 0.30 per cent, stepping up efforts to calm shaky markets and fight recession in Asia's largest economy.

The Bank of Japan's monetary policy board was evenly split on whether to lower interest rates, so the final decision was taken by governor Masaaki Shirakawa, the bank said in a statement.

The BoJ also decided to start paying interest on commercial banks' excess reserves held on account as part of continued efforts to ease strains in the money market.

It was the first interest rate cut by the Japanese central bank since March 2001, when it introduced an unprecedented policy of almost free credit to try to pull the economy out of the deflationary doldrums.

Japan's economy will post tepid growth of just 0.1 per cent in the current financial year, much weaker than a previous forecast of 1.2 per cent, the central bank said.

The Japanese economy will remain sluggish next year with growth of just 0.6 per cent, added the central bank. Previously it had expected growth of 1.5 per cent next year.

The Japanese economy shrank in the second quarter of this year and there are increasing fears that it is once again in recession, which is usually defined as two straight quarters of economic contraction.

- AFP/ir