The surprise moves came a week ahead of a meeting of the Group of Seven industrial countries in Bonn. Finance ministers and central bankers will be focussing on how to revive the ailing Japanese economy, a precondition for restoring economic stability in the rest of South-east Asia.
The Bank of Japan's measures yesterday should take the sting out of criticism of the country's policies by its G7 partners.
But the Bank's board rejected some politicians' proposals that it should buy Japanese government debt in the market.
This would have eased monetary conditions and helped bring long-term interest rates, which have climbed in recent months because of the expansion of the government debt, back down.
The Bank's reluctance to do more to curb the rise in long-term bond yields in Japan hit bond markets in the US and Europe, where prices fell steeply.
The Bank of Japan halved the rate on its emergency lending facility to 0.25 per cent, and cut the rate on overnight loans in the Interbank market to 0.15 per cent from 0.25 per cent. It also said it would inject extra funds into the money markets in order to ease credit conditions.
In a statement Masaru Hayami, the governor, said he hoped the moves would take long-term rates lower and thus help boost the economy. The official discount rate remained unchanged at its record low of 0.5 per cent.
The announcement initially sent the dollar a yen higher, past the Yen115 mark, but it later fell back to Yen114.15 as US Treasuries fell. Analysts were sceptical that the rate cuts would help the economy, now in its second full year of recession. David Brickman at PaineWebber said: "It smacks of desperation. It is a tacit admission that the economy remains in dire straits."
Stephen Lewis, chief economist at Monument Derivatives, said extra liquidity was unlikely to help the economy until Japanese banks had strengthened their balance sheets and were able to lend to customers.
More and more economists, such as Paul Krugman, professor at the Massachusetts Institute of Technology, favour radical measures - including the repurchase of government bonds to "monetise" the debt.
But until recently the US administration had opposed easier monetary policies that might weaken the yen and consequently widen the US trade gap. In the past two weeks, US officials have started urging monetary easing.