TOKYO (AFX-ASIA) - The dollar/yen was firm in late morning on speculation the central bank has agreed to consider easing monetary policy at the month-end, in exchange for more government action to resolve bad-loans, dealers said. BoJ governor Masaru Hayami told AFX-Asia this morning that the central bank may increase outright purchases of government bonds if needed. Until now, Hayami has maintained that increasing monthly outright purchases from the current 800 bln yen would be inappropriate, despite repeated calls from the government to raise the level to 1 trln yen. "If it is needed, we will do it, but if it is unnecessary we do not need to do this. Our policy board meeting will decide," he said in the parliament building, asked if he will continue to resist calls for further monetary easing. Local media have reported Hayami urged Prime Minister Junichiro Koizumi at a meeting this week to decide quickly on bad-loan resolution, including possible public fund injections, offering further monetary easing in exchange. However, Hayami denied this morning that the bank had been pressured by Koizumi to ease policy further, saying: "There was no such talk in the meeting. We just discussed recent financial conditions." The speculation of further easing helped to support the dollar/yen despite the sharp gain in Japanese equities this morning, with the benchmark Nikkei 225 stock index up almost 2.5 pct. Lehman Brothers head of foreign exchange Hiroyuki Mukaibo said the central bank governor may be using monetary policy as a bargain chip to gain a more rapid response by the government on cleaning up the banks' bad-loan problems. "Hayami, the other day, went to see Koizumi to say the government should be ready (for action), and the government said they are in-sync," he noted. "It's weird why the BoJ is asking them. It looks like Hayami is playing a game that if they put in the money, then we will ease," Mukaibo said. Mukaibo said the forex market is dominated by speculators, given such backroom activity on the policy front. "Ninety-nine per cent (of trade) is (speculative)," he said, noting investors are waiting to see whether the impending fiscal year-end in March will trigger financial-market scares, though he believes the central bank will help smooth any problems. "Toward the year-end people will worry about the Japan premium but the BoJ is going to put in a lot of liquidity," he said. "There are no banks that are going to go down at all. They may nationalise some." Meanwhile, the issue of repatriation of funds by Japanese investors ahead of the fiscal year-end appears to be waning, with the bias for the dollar/yen likely to be towards the upside. "The repatriation thing is over. I don't think asset managers ... in the past year or two are taking many risks. Whenever they (invest), it's hedged," Mukaibo said. "The range is going up. If there is a 135 yen break-through, this is a big deal," he said, adding that investors would then target 135.50-136.00 yen.