TOKYO (AFX-ASIA) - Bank of Japan governor Masaru Hayami said the government needs to inject capital into the banks, given the current situation. The central bank today decided to ease monetary policy further by increasing its monthly outright purchases of government bonds to 1 trln yen from 800 bln. The bank will also provide more liquidity, regardless of its existing target of maintaining current-account balances at 10-15 trln yen, and extend the available operational days for the use of Lombard-style discount lending. "Banks' stock holdings are creating latent losses, reflecting recent stock-price declines, requiring banks to cover the loss of value with their own capital. Bad-loan disposals will also eat into capital," Hayami said. "I think banks cannot increase their capital with the help of outside parties, so they need to receive capital injections," he said after today's policy board meeting. "There is a high possibility of an injection of public funds in the future. Even under the current Deposit Insurance Corp law, the government can inject public if necessary, in a pre-emptive action," he said. "However, the Financial Services Agency says it will decide on a capital injection after its special inspection, which I think will end around the end of March, although I hope the government injects capital this fiscal year." Hayami said the central bank may boost liquidity way beyond its target for current-account balances of 10-15 trln yen ahead of the fiscal year-end. "We estimate the balance of current-accounts will possibly increase to 20 trln yen. We cannot predict what will happen in the financial markets as we head into April so we decided to set the stage to provide even more liquidity. "Today's policy-board meeting appeared to be the last chance to decide on measures towards the end of March as the next meeting is scheduled for March 19-20," Hayami said. "Amid stock price declines, including bank stocks, as well as the looming introduction of the pay-off (limited-deposit) system, we need to consider seriously the fact that the banks are facing hardship," he said. "Banks cannot at this time improve their profitability rapidly, even after implementing restructuring programs. At stake is the need to increase their own capital to proceed with their bad-loan disposals," he said. "In these circumstances, the banks are approaching a very difficult time heading beyond the end-March book closing," he said. Hayami described as "not a big change" the decision today to increase outright purchases of government bonds by 200 bln yen per month. "However, if we solely buy 10-year government bonds, it may trigger an increase in interest rates due to concerns over the BoJ's credibility. So we need to closely watch market conditions."