The BoJ Policy Board decided by a majority vote at a regular monetary policy meeting to lower its target for the key overnight call rate in the money market to about 0.15 per cent from the current 0.25 per cent, the central bank said in a statement. The BoJ also said it may guide the overnight target rate down further depending on market conditions.

The bank said it would halve the rate on an emergency lending facility for banks to 0.25 per cent from Feb 22 and would provide more funds to the money market to boost money supply. The flurry of moves surprised the bond market, where participants had largely expected no central bank action. The benchmark yield on 10-year Japanese government bonds fell 0.07 percentage point to 2.010 percent and theJapanese currency dropped roughly one yen against the dollar soon after the announcement. Still, the market reaction was muted.

"It's still the same old thing," said Peter Morgan, an economist at HSBC Securities. "They are basically targeting the overnight call rate. It's true that to the extent that you lower that rate, it will increase demand for cash and reserves, so it would presumably result in some expansion in the (BoJ's) balance sheet." But, as far as the economic impact, "it does about as much as the last cut did," Morgan said. "You really can't expect a significant impact." Hajime Takata, chief strategist in the investment strategy department of IBJ Securities, said the BoJ move will certainly cap the rise in long-term interest rates, but the extent to which it can bring rates down will be limited compared with last September's easing. Takata predicted that the yield on the benchmark 10-year JGB will fall to around 1.9 per cent from the current 2 percent-level.

Friday's meeting was underunusually close scrutiny, as long-term interest rates have climbed in recent weeks and politicians have spoken publicly about what the central bank should do. A small but vocal group in the ruling Liberal Democratic Party wants the BOJ to underwrite JGBs directly from the government, while others say the central bank should increase the JGB purchases it already makes in the market.

Proponents of increased JGB buying by the central bank say it would curb the rise in JGB yields, which have been sparked by concerns that the bond market cannot absorb the flood of new debt the government plans to issue to cover its huge packages of stimulative public works spending and tax cuts.

IBJ Securities' Takata noted that "the BoJ left its stance on outright JGBbuying operations unchanged this time, but the issue (of whether it should expand purchases) could be raised again in the future."