The cut came after an emergency meeting last Friday between the Prime Minister, Kiichi Miyazawa, and his top economic advisers, called to inspire some confidence in the Japanese economy in the plunging Tokyo stock market.
Economists said the timing of Friday's meeting and the subsequent leaking of news about the discount rate cut appeared to be politically motivated since Japanese voters went to the polls yesterday to elect 127 members of the upper house of parliament.
Traditionally the ruling Liberal Democratic Party gains electoral support during times of economic downturn by projecting itself as the only party that can be relied on to get business moving again.
On Friday Mr Miyazawa said a supplementary budget in the range of Y6,000bn to Y7,000bn ( pounds 26bn to pounds 30bn) would be presented by the government in September.
News of the meeting came after the Nikkei stock average plunged to its lowest level in six years. But dealers said the supplementary budget and the interest rate cut had long been expected and predicted further turbulence for stock prices in the coming week.
The Bank of Japan had been resisting another cut in interest rates. The official discount rate has been lowered four times since last July, with the last cut in April.
However, in its last quarterly report released last month, the bank admitted that the economy was not improving as quickly as expected because of a slowdown in consumer spending and a delay in inventory reductions in many industries. It also appears concerned at the very growth in money supply.Reuse content