The Bank of Japan on yesterday lowered its overnight interest rate target, a decision swiftly condemned as a disastrous retreat under political pressure.

The bank, which has been under intense lobbying from the government to ease monetary policy and increase purchases of government bonds, said it would guide the overnight call rate to 0.15 per cent from 0.25 per cent.

The rate would later be cut to "the lowest possible levels", depending on the markets, it said in a statement after an eight-hour policy board meeting that ended with a majority decision.

"There was absolutely no pressure from outside," Bank of Japan governor Mr Masaru Hayami said.

"The voices calling for central bank underwriting or purchases of government bonds are nonsense," he said.

While rejecting calls for more bond purchases, the Bank of Japan said it planned "to utilise the repo operation involving government bonds more actively than before".

Under repo, or repurchase, operations the Bank of Japan buys bonds from commercial banks for a set period to provide liquidity, under the condition that the banks will buy them back later.

"I think it is disaster," an economist at Merrill Lynch Japan, Mr Ronald Bevacqua, said.

The decision was wrong "not only because I think it has very little impact on long-term interest rates but it clearly shows they are sensitive to political pressure", he said.

The Bank of Japan left the official discount rate, the rate charged on central bank loans to financial institutions, unchanged at the record-low point of 0.5 per cent.