Japan cuts key interest rate to 0.1%

Japan cut interest rates to just above zero today and announced extra steps to ease a credit crunch that has ravaged companies worldwide and plunged leading economies - including its own - into recession.

Carmakers are among the hardest hit by the global economic downturn, with Toyota expected to report its first ever annual parent loss and US firms scrambling to secure emergency government funding to avoid collapse.

Highlighting the recessionary squeeze on manufacturers, German industrial group ThyssenKrupp AG said it would cut crude steel production to a minimum level from February if necessary, and introduce shorter hours for 20,000 steelworkers.

The German economy's downward slide is likely to gather speed in the final quarter of this year but deflation should not be feared, the Finance Ministry said in its December monthly report on Friday.

And French business confidence fell to a historic low in December, sliding much more sharply than expected.

European stocks fell in early trade, tracking a drop in US and Asian shares, with heavyweight energy and mining shares worst hit.

In a telling sign of falling global demand, oil prices have hit four-year lows despite a big OPEC supply cut this week aimed at supporting the price. However, February Brent crude futures were slightly firmer on Friday around $43.70 a barrel.

The Bank of Japan's decision to lower its key policy rate to 0.10 percent from 0.30 percent follows Tuesday's dramatic rate cut by the US Federal Reserve, which took rates there below Japan's and helped push the yen to a 13-year high against the dollar, putting pressure on the BOJ to take action.

The dollar enjoyed a brief lift against the yen after the rate cut, but quickly gave up its gains, hurt by ongoing worries about the US economy's outlook.

The BOJ also said it would step up outright buying of Japanese government bonds and would temporarily buy commercial paper outright - further moves to ease the credit squeeze throttling the world's second-biggest economy, already in recession.

Calling the economic turmoil of the past few months "the most rapid in our lifetime", BOJ Governor Masaaki Shirakawa told a news conference he could not rule out further rate cuts.

He said the decision to cut rates and buy more assets did not mark a return to a quantitative easing policy, the final option of any central bank in which the financial system is awash with cheap funds to try to revive lending.

"The BOJ appears to have gone all out this time by deciding to take a wide variety of steps," said Koji Ochiai, senior market economist with Mizuho Investors Securities.

"What was a little surprising, however, was that it did not lower interest rates all the way to zero like the Fed did this week. The BOJ leaves itself exposed to pressure to now cut rates to zero."

In the United States, General Motors Corp and Chrysler LLC closed in late Thursday on a deal to secure emergency loans as part of a US government aid package that would demand sweeping restructuring at the troubled automakers, sources familiar with the talks told Reuters.

Emergency federal loans for the two could be announced as early as Friday, when Chrysler is set to begin a month-long production halt, the sources said.

US Treasury Secretary Henry Paulson offered mixed signals on the chances of a bailout for the industry, saying failure of firms such as Chrysler and GM was not an option but adding that any potential bankruptcy should be "orderly."

"President Bush has been pretty clear that, since Congress has failed to act, he wants to take steps to avoid a failure," Paulson told a financial forum in New York.

But, he added: "If the right outcome is bankruptcy, then it's better to get there through an orderly process."

Two people briefed on the talks said the aid package being spearheaded by the White House would demand that both GM and Chrysler restructure by seeking new concessions from organised labour and creditors.

Canadian Prime Minister Stephen Harper said on Thursday his government could run a deficit of as much as C$30 billion ($25 billion) next year to fund a stimulus package aimed at kick-starting the weakening economy.

The deficit spending - the first in Canada in a dozen years - would include billions of dollars for infrastructure and public housing construction, tax breaks to fuel consumer spending and training for workers who lose jobs.