Japan's central bank sliced lending rates to 0.1 percent from 0.3 percent on the day the government forecast the economy would not grow at all until 2010.

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

The cut, which was agreed in a 7-1 vote by the bank's policy board, had an immediate effect on the currency markets, bouncing the US dollar back from 13-year lows against the yen.

It follows a similar move Tuesday by the US Federal Reserve, which slashed its lending rate to 0-0.25 percent from 1.0 percent as it tries to bolster the world economy.

Denmark's central bank also unexpectedly cut its key interest rate Friday by 0.50 percentage points to 3.75 percent.

In a statement the Bank of Japan painted a grim picture of the economy and echoed sentiments that led to the government's prediction of zero growth in real terms for seven years.

"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 economic growth -- were decreasing on slack demand overseas.

With the world's second largest economy battered by weak domestic demand and exports, the Washington-based Institute of International Finance (IIF) said the global economy would shrink 0.4 percent in 2009, after 2.0 percent growth this year.

Charles Dallara, managing director of the IIF -- which represents more than 375 of the world's major banks and financial institutions -- called it "the most severe, globally synchronised recession in modern economic history".

The global crisis requires a global coordinated response, he said at a news conference.

"You'll see much more bang for the buck" with a coordinated response, he said, adding: "It will be important that these measures be complemented in Europe and in Japan."

The IIF said in its monthly Global Economic Monitor report: "It should be emphasised that an overall contraction in the global economy is a truly weak outcome, and the first time this has happened in the post-1960 period."

Mature economies -- including the United States, the 15-nation eurozone and Japan -- that are now in recession were forecast to contract a hefty 1.4 percent amid the worst financial crisis since the Great Depression.

The US economy, the world's largest and the epicentre of the financial tsunami, would shrink 1.3 percent in 2009 after growth of 1.2 percent this year, according to the IIF projections.

The eurozone would contract by 1.5 percent from 0.9 percent growth, and Japan would shrink 1.2 percent after zero growth, the IIF said.

In a further sign of the impact of the downturn on Europe, France's state statistics office said Friday the country would sink into recession next year for the first time since 1993 while it also faces a steep rise in unemployment.

"The business climate has considerably deteriorated in France in the last year and a half, coming close to the levels seen in the 1993 recession," the report said.

Germany's national statistics office meanwhile said that producer prices in the continent's economy biggest fell by 1.5 percent in November on the previous month, the biggest monthly drop since statistics began to be compiled in 1949.

The sharp decrease -- largely due to lower energy prices -- was much bigger than expected by analysts.

The weakening global energy demand caused by the economic slowdown continued to push crude oil prices downward, with the cost of a barrel of New York crude sinking to 35.62 dollars, the lowest point for four and a half years.

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