The Bank of Japan has cut interest rates for the first time in seven years - but it has not been able to stop markets continuing to slide.

With the policy board voted to a 4-4 deadlock, governor Masaaki Shirakawa cast the deciding vote to trim the central bank's key interest rate to 0.3% from a decade-high 0.5%.

But Tokyo's Nikkei 225 index sank 5% after the cut as investors who wanted a full quarter-point cut branded the step as "half-hearted".

The moves comes after government pressure to join the global response to the worldwide credit crunch, but the markets had widely expected a cut to 0.25%.

The rate cut was announced two days after the US Federal Reserve slashed rates by 0.5 percentage point to 1%, while China, Hong Kong and Taiwan also cut rates this week.

The central bank also cut its economic outlook, saying the the world economy faced severe conditions for some time.

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