The Japanese unit traded at 98.45 against the dollar shortly after the central bank made the announcement at around 2.00pm (0500 GMT, 1pm Singapore time), barely changed from 98.42 in early trading.

'Right after the announcement, we saw yen-selling moves as the cut was slightly smaller than earlier expected,' said Mr Akira Takeuchi, a dealer at Chuo Mitsui Trust Bank.

'But the selling moves died out a few minutes later and it returned to the previous level, as players concluded that the Bank of Japan actually reversed its stance by taking action', Mr Takeuchi said.

It was the first interest rate cut by the Japanese central bank since March 2001, when it introduced an unprecedented policy of almost free credit to try to pull the economy out of the deflationary doldrums.

The Bank of Japan had until recently aimed to raise interest rates, seeing its level as conspicuously low, allowing investors to binge on Japanese credit to invest elsewhere.

But the yen last week hit a 13-year high against the dollar as dealers unwound such risky bets due to the economic crisis.

The euro rose to 126.41 yen from 125.92 yen in Tokyo morning and to US$1.2853 gainst US$1.2796. -- AFP