TOKYO - JAPAN'S central bank said on Tuesday that it would lend up to US$10 billion (S$15.3 billion) to commercial banks in the latest effort to tackle a deepening recession in Asia's biggest economy.

The Bank of Japan said it would supply funds of up to one trillion yen to encourage the banks to keep lending during the credit crunch.

The extraordinary measure is the latest in a series of steps by the Bank of Japan to fight what is feared to be Japan's worst economic downturn since World War II.

The announcement came during a two-day monetary policy meeting through Wednesday at which the bank is expected to leave interest rates unchanged at 0.1 per cent for a third straight month.

The bank has trimmed official borrowing costs twice since October. With almost no room left to reduce its key lending rate any further, it is seeking alternative tools to spur lending.

Last month the BoJ announced plans to buy up to one trillion yen of corporate bonds from commercial banks to ease a credit crunch.

That followed a decision to buy one trillion yen worth of shares held by commercial banks and to spend up to three trillion yen to buy commercial paper, a type of short-term corporate debt.

Japan's economy logged its worst performance in almost 35 years in the last quarter of 2008, contracting at an annualised pace of 12.1 per cent. Many analysts expect the recession to be the worst in the post-war era.

Japan's banks have been less affected by the global credit crunch than many of their US and European peers, but they have lost money because of the plunging stock market and are becoming more reluctant to lend money. -- AFP