Japan cut interest rates for the first time in seven years on Friday, expecting severe stress in the global economy to persist, while UK banking giant Barclays said it was raising $12 billion in capital.
Interbank lending rates fell sharply, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.
The Bank of Japan's move followed a rate cut from the U.S. Federal Reserve earlier in the week and likely presaged the same from the European Central Bank and Bank of England next week.
Inflation in the euro zone fell to 3.2 percent year-on-year in October, the European Union's statistics office said, data likely to ease any concerns at the ECB about rising prices.
Policymakers have been struggling to find the right response to a rapid global slowdown that has hammered corporate profits and sparked a record freefall in stock markets in October.
Fallout from the crunch continued to spread on Friday with Barclays Plc saying it planned to raise 7.3 billion pounds ($12.06 billion) in additional capital from outside investors including Gulf states Qatar and Abu Dhabi.
Earlier this month, Barclays said it wanted to raise capital but would raise it privately rather than take UK government cash, as rivals Royal Bank of Scotland, Lloyds and HBOS are.
"There has been a significant shift in the availability of capital and economic power in the world over the last five years and we're ensuring we're aligned with those changes," said John Varley, Barclays' chief executive.
Mizuho Financial Group became the second major Japanese bank this week to cut its full-year net profit forecast by more than half because of bad loans and losses in its equity portfolio.
The global downturn has come hard on the heels of the credit crunch, the worst financial crisis since the Great Depression, with investors facing what Japanese Prime Minister Tara Aso called "a harsh storm seen only once in 100 years".
There were mixed signs about the credit crunch. Interbank rates — the cost banks charge to lend to each other — fell.
But at the ECB, overnight deposits from banks soared to a new record, suggesting banks still preferred to deposit money with the central bank than lend to each other.
Equity markets fell again, with Japan's Nikkei closing down 5 percent on disappointment at the size of the interest rate cut.
European shares were off 0.9 percent and Wall Street looked set for a similarly weak start.
RATE CUTS
The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction that the quarter point many had expected.
A 4-4 vote on the policy board meant the central bank governor had to cast the deciding vote.
"At a time of extreme financial uncertainty and volatility, to have a policy board so evenly split is hardly reassuring," said Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong. "Whatever the desired outcome, the fact that the board was so evenly split jeopardises that outcome."
The rate reduction was the latest in a series globally as central banks move rapidly to try to cushion growth now that interbank lending rates have started falling.
The average benchmark interest rate in the Group of Seven countries has dropped to 2.36 percent, the lowest since April 2005, from 4 percent in August 2007 when credit markets began imploding because of mounting subprime mortgage defaults.
Economists widely expected Australia, Britain and the euro zone to cut rates next week.
CONTRACTION
The economies of Britain, Europe, Japan and the United States are contracting. The latest growth data showed the U.S. economy shrank in the third quarter, three months that included the dismantling of the Wall Street investment bank model.
After Thursday's data showed the U.S. economy shrank at a 0.3 percent annual rate in the third quarter, investors will look to consumption and inflation data later for more evidence of decline.
Companies are also being to feel the pain.
A deal to merge General Motors Corp and Chrysler LLC has hit an impasse after the Bush administration ruled out funding for it, according to Reuters sources.
The car giants are seeking to merge as they struggle with the economic slump.
In Japan, Nissan Motor and Suzuki Motor issued profit warnings.
Along with central banks, governments around the world were waging an all-out battle to contain the fallout from the financial crisis, including by cutting taxes, taking equity stakes in banks and backing bank deposits.
The South Korean government is considering $7.3 billion in additional spending to support domestic demand, according to a local business paper, as the worst fears appeared to have dissipated about a meltdown in Asia's fourth-largest economy.
On Thursday, Japan also unveiled a $50 billion economic stimulus package and German cabinet minister Michael Glos said Europe's largest economy planned to introduce a range of steps worth up to $39 billion.
