Governor Masaru Hayami said on Thursday he wanted to switch the central bank's policy back to targeting the inflation rate, but that it was too early to set a level now.

In order to prevent Japan falling into recession, the Bank of Japan said on Monday it would add enough money to the economy to prevent any banks going out of business.

But the change could take longer than he might think after a raft of bank news and earlier falls on the Dow Jones index hit the Nikkei stock market in the afternoon which closed at 12,853 down 250 points, or 1.91%.

The data showed companies slashing their spending plans and reports that Japan's top 16 banks will book a total of 4 trillion yen ($32bn) in bad loans for the fiscal year ending in March, up 60% on forecasts.

"Responding favourably"

Mr Hayami said he was keeping a close eye on financial markets after the central bank's monetary policy easing steps and that stocks were responding favourably.

"Stocks have been reacting favourably and long-term interest rates have fallen sharply," Mr Hayami told a news conference.