June 15 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui said he wants to be more convinced that the nation's economic growth is sustainable before proposing an interest-rate increase. The yen fell.

``We need to be more confident about the outlook for the economy and prices,'' Fukui said today in Tokyo. Board members were ``in absolute agreement that there are still many factors that need to be examined closely,'' including consumer prices, long-term bond yields and spending by companies and consumers.

Fukui and his policy colleagues today unanimously voted to keep the key overnight lending rate at 0.5 percent, the lowest among major economies, after consumer prices fell for a third month. Eleven of 17 economists surveyed predict the bank will raise the rate in August after its Tankan business survey, a second-quarter economic growth report and Upper House elections.

``Governor Fukui's comments suggest the central bank has no intention of rushing to increase interest rates in July,'' said Yasunari Ueno, chief market economist at Mizuho Securities Japan Co. in Tokyo.

The yen fell to 164.35 against the euro at 10:17 a.m. in London from 163.63 yesterday. It dropped as low as 123.48 per dollar, the weakest in more than four years, from 122.92.

Japan's low interest rates are encouraging investors to send money overseas in search of better returns, weakening the yen. Fukui indicated that the central bank won't necessarily act just to halt a decline in the currency.

`Not So Simple'

``It's not so simple that we can immediately conclude that the yen's drop is a risk,'' he told reporters.

The central bank's 0.5 percent key rate compares with 5.25 percent in the U.S., 4 percent in countries that share the euro and 8 percent in New Zealand.

Fukui also commented on a recent increase in long-term bond yields worldwide. The yield on Japan's 10-year bond touched an 11-month high of 1.985 percent earlier this week on expectations interest rates will rise.

Long-term yield levels ``are something we take into consideration but aren't a determining factor,'' Fukui said, adding that he doesn't anticipate a drastic increase in global bond yields because expectations for inflation are subdued.

The yield on the 10-year bond fell 4 basis points to 1.915 percent after the governor's comments.

U.S. Economy

Fukui said the central bank needs to further monitor developments in the U.S. economy, which grew an annual 0.6 percent in the first quarter, the slowest rate in four years.

``A little more examination is necessary before everyone can become convinced that the U.S. economy is achieving'' a soft landing, he said.

Concern that the U.S. slowdown may deepen has receded in the past month. The Federal Reserve this week said the U.S. economy is expanding without stoking inflation.

``What concerns the Bank of Japan most is the strength of U.S. economy,'' said Ueno at Mizuho Securities. ``It's crucial for the bank to check whether growth in the U.S. rebounds.''

Japan's Upper House parliamentary elections scheduled for late July are another reason why the central bank will avoid raising rates next month, according to economists including Ueno.

Policy makers will be better able to assess the strength of Japan's economy after the bank publishes its quarterly Tankan business survey on July 2 and the government releases a report on second-quarter economic growth in mid-August.

Still, Japan's falling consumer prices will remain a barrier for the central bank to raise rates before October, said economist Jan Lambregts. Consumer prices excluding fresh food fell 0.1 percent in April.

``Mild deflation is still out there and the Bank of Japan has a very difficult story to sell,'' said Lambregts, head of Asia research at Rabobank International in Hong Kong. ``The fact that the decision was unanimous reinforces that the Bank of Japan will only raise rates in the fourth quarter.''

To contact the reporters on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: June 15, 2007 05:20 EDT