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The Bank of Japan last night cuts the nation's interest rates to 0.1 per cent.

The move came as the Japanese government forecast its economy to have zero growth in the 12 months to March 2010.

For the current year, the Japanese economy is set to shrink by 0.8 per cent. In July – before the credit crisis exploded – the economy was expected to grow by 1.3 per cent.

In making its interest rate cut, the Bank of Japan noted: "Exports have been decreasing reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of the declining corporate profits and the worsening employment and income situation in the household sector.

"Financial conditions have deteriorated sharply on the whole."

It added: "Looking further ahead, uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased.

"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."

Julian Jessop at Capital Economics explained the Bank of Japan was following the actions of the US Federal Reserve – which this week cut rates to a zero to 0.25 per cent range – and the nation could well go to zero in 2009.

He said: The BoJ will want (and have to be seen) to match the Fed in its response to the sharp economic slowdown both at home and abroad.

"Evidence of growing strains within the Japanese financial system is mounting. The last straw is the risk of further yen strength now that US official rates are lower than those in Japan."