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Oct. 31 (Bloomberg) -- The Bank of Japan cut its benchmark interest rate to 0.3 percent in a split decision to help stave off a prolonged recession.

A rate cut will probably do little to prop up the economy; nevertheless the bank was probably fearful they'd be viewed as clinging to an overly rigid stance in the middle of a global crisis if they didn't cut, said Teizo Taya, a former Bank of Japan board member who now advises the Daiwa Institute of Research.

The yen rose to 97.34 per dollar at 3:41 p.m. in Tokyo, from 98.43 before the decision. Japan's currency climbed as high as 90.93 last week, the strongest in 13 years, threatening exporters earnings. The Nikkei plunged 5 percent today.

The central bank decided to begin paying interest on reserves commercial lenders hold at the bank to provide liquidity to the financial system. It also trimmed the Lombard rate, or the cost it charges for loans made directly to member banks, to 0.5 percent from 0.75 percent.

Speculation the Bank of Japan would cut rates was fueled by a Nikkei newspaper report on Oct. 29 that said policy makers were leaning toward a reduction. The chance the bank would halve its key rate rose to 60 percent today from 8 percent earlier this week, according to calculations by JPMorgan Chase & Co.

Given the state of the economy and financial markets, this is the time to lower borrowing costs, said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. The yen has been weakening because investors already factored in a rate reduction, so it would be difficult for the BOJ to resist.

The U.S. Federal Reserve cut its benchmark rate to a record-equaling 1 percent this week and China lowered borrowing costs for a third time in two months.

Evidence that the world's second-largest economy is faltering mounted in the past month as the global crisis deepened. Exports climbed 1.5 percent in September, less than half of what economists expected, and industrial production tumbled for a third quarter. Reports today showed inflation eased and household spending fell for a seventh month.

A rate reduction may provide some relief to Prime Minister Taro Aso, who yesterday unveiled a $51 billion economic stimulus package in a bid to minimize the effect of tumbling stock prices and the surging yen on the economy.

Reporter on this story: Mayumi Otsuma in Tokyo at www.bloomberg.com