Tokyo - The Bank of Japan on Friday cut its key short-term interest rate to 0.3 per cent from 0.5 per cent to help the world's second-largest economy weather the global financial crisis.

The bank's policy board voted 5-4 to lower the rate for the first time in seven and a half years at the end of a one-day meeting.

Governor Masaaki Shirakawa cast a vote to support the rate cut, saying the nation's economy would need more time to recover amid weak exports and high raw material prices.

The bank's decision was "prompted by substantial changes in economic and financial conditions," the governor said at a press conference, adding that the global market turmoil was affecting Japan's corporate capital spending, exports and production.

Japan's central bank has maintained the overnight lending rate at 0.5 per cent since February last year when it raised the rate from 0.25 per cent. The bank ended a six-year policy of maintaining near-0-per-cent interest rates in July 2006.

Despite the rate cut, Japan's benchmark Nikkei Average index ended Friday's trading 5 per cent lower at 8,576.98. The yen remained higher against other currencies.

While the Japanese government welcomed the BOJ's rate cut, economists said it would do little to prop up the economy.

"We can't expect the economy to lift up too much from the 0.2-point rate cut," Takahide Kiuchi, senior economist at Nomura Securities Co, said.

Kiuchi added that the bank's board expected the lower rate would help stabilize the financial market, while hoping at the same time to suppress the yen's rise and falling stock prices as a way to improve the nation's economy.

At the meeting, the BOJ policy board cut the nation's gross domestic product (GDP) growth forecast for the full year to 0.1 per cent, down from an initial 1.2 per cent it had expected in July.

For the next fiscal year starting in April 2009, real GDP growth was estimated at 0.6 per cent, down from the previously estimated 1.5 per cent.

The bank's move on Friday, which was in concert with the US Federal Reserve and the European Central Bank, was expected to help stabilize the yen against other major currencies. A strengthening yen erodes the earnings of Japanese firms operating abroad.

At the meeting Friday, the Bank of Japan's policy board also decided to offer interest payments on banks' reserves, which are deposited at the central bank, and to provide more liquidity for the money markets. (dpa)