TOKYO - THE Bank of Japan on Friday slashed its benchmark interest rate to just 0.1 per cent, joining a wave of global cuts as it warned of a sharp deterioration in the world's second largest economy.

Japan's central bank also tried to shore up ailing credit markets by announcing it would start directly buying commercial paper, the short-term debt that companies issue to run their daily operations.

In a 7-1 vote, the Bank of Japan policy board said that it was cutting the benchmark rate of borrowing from 0.3 per cent to 0.1 per cent.

The level is even lower than the top range of 0.25 per cent set this week by the US Federal Reserve, which drastically cut its own rate in hopes of bolstering the global economy.

Japan's benchmark Nikkei stock index jumped after the rate cut before slipping back down. The yen also eased back modestly against the dollar after this week soaring to a 13-year high against the greenback.

The Bank of Japan, issuing a statement explaining its decision, offered a bleak picture of the economy.

'Financial conditions have deteriorated sharply on the whole,' it said.

'Under these circumstances, economic conditions have been deteriorating and are likely to increase in severity in the immediate future,' it said.

It voiced concern that Japanese exports - which for years fuelled the country's economic growth - were decreasing due to slack demand overseas.

'Given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied,' it said.

Government leaders had made little secret that they would welcome a rate cut by the central bank, which is independent.

Lower rates often bring down the value of currencies by making them less lucrative, although they can also support the currency if seen as bolstering the overall economy.

The stronger yen makes Japanese exports less competitive overseas, further weakening the outlook for companies suffering from the global downturn. -- AFP