By Chris Oliver, MarketWatch HONG KONG (MarketWatch) -- The Bank of Japan cut its key interest rate to 0.1% from 0.3% Friday, marking its second rate reduction this year in the wake of worsening economic indicators and increasing pressure from the government to do more to help the economy. The central bank's board voted 7-1 for the cut, with Tadao Noda opposed. The central bank last had lowered the interest rate in October, when deteriorating economic conditions forced it to abandon its goal of normalizing interest rates and cut the overnight call rate by 0.2 percentage points from 0.5%. The extent of the cut was in line with expectations. On Tuesday, the U.S. Federal Reserve cut the federal funds target rate to just above zero, a record low, and said it "will employ all available tools to promote the resumption of sustainable economic growth." See full story. "Following the U.S. Fed's bold easing steps, the Bank of Japan is now more likely than not to cut the overnight rate target by 20 basis points to 0.10% on December 19 with additional liquidity injection measures, in our view," Tomoko Fuji, head of economics and strategy for Bank of America in Tokyo, said ahead of the central bank's meeting. Steps to ease credit Speculation circulated midweek the BOJ would take steps to ease monetary conditions at the conclusion of its two day meeting Friday. Economists said the central bank would likely seek more time to evaluate the effects of its recent interest rate reduction before cutting again, likely opting instead to unveil new measures aimed at easing the credit crunch at the corporate level. Japan's Finance Minister, Shoichi Nakagawa, said Wednesday the government would take all necessary steps to support the economy, including moves to address rapid changes in foreign exchange markets. He added that the BOJ was in charge of monetary policy. Prime Minister Taro Aso said the government would not intervene in the central bank's business. He did, however, express hope for policy decisions by the BOJ that would benefit the market. "The current situation is not as simple as one that can be improved by a single BOJ decision, but we are hoping for things that have a favorable impact," he said, according to the business daily Nikkei. At the conclusion of their November meeting, BOJ Governor Masaaki Shirakawa and other central bank board members directed the bank's research department to examine the merits of commercial-paper purchases. The BOJ currently accepts commercial paper as collateral in providing loans to financial institutions, but does not take ownership, meaning that any default on that paper reverts to the financial institution. The Japanese central bank officially ended quantitative easing in March 2006. Purchases of Japanese government bonds have continued mostly unchanged since abandoning the policy, with the BOJ acquiring about 1.2 trillion yen worth every month. Shirakawa has previously said he's reluctant to cut interest rates from already low levels, fearing further reductions could impair the normal functioning of money markets. But evidence is mounting that Japan's economy is poised for more hard times. The central bank's December tankan survey, released Monday, showed business confidence among large manufacturers plunged at its fastest rate since the mid-1970s oil shock. The sentiment survey also showed firms were getting more pessimistic about the future, with outlooks indicating confidence likely to deteriorate in coming quarters. Japan's slowdown has been felt mostly throughout the manufacturing sector, but looks set to spread into the broader economy as both manufacturers and non-manufacturers indicate they intend to cut staff as profits decline. "We are now starting to see considerable pressure on the domestic front, which could result in a wave of corporate downsizing along with further cuts to capital investment," wrote Credit Suisse economists headed by Hiromichi Shirakawa in Tokyo.

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