Sept. 8 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui said consumer prices will keep rising, reinforcing speculation that the central bank will increase interest rates before the end of the year.

``Prices are basically on a positive trend,'' Fukui told reporters in Tokyo today. Last month's revision to the way consumer prices are measured ``won't prompt us to change our basic stance.''

The Bank of Japan kept its overnight lending rate at 0.25 percent earlier today, as expected by all 62 economists surveyed by Bloomberg News, and said the economy is expanding moderately. Fukui said the bank maintains its view that interest rates should be adjusted gradually depending on the economy and prices.

The governor's comments ``cleared the air of pessimism among investors'' that the bank had ruled out a rate increase before the end of the year, said Masaki Fukui, an economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd.

The yen may strengthen to 115 per dollar next week, according to Mizuho's Fukui, who isn't related to the governor. The yen traded at 116.45 against the dollar at 11:09 a.m. in London, from 116.43 in late New York yesterday and 117.09 a week ago.

Consumer Prices

Yields on Japan's benchmark 10-year bonds had the biggest one-day drop in three years on Aug. 25 when a government report showed consumer prices based on a reshuffled basket of goods grew at half the pace forecast in July, prompting speculation the bank would delay a further rate increase until next year.

Yields on Japan's benchmark 10-year bond rose 1.5 basis points to 1.715 percent at 6:19 p.m. in Tokyo. They have risen from 1.6 percent on Sept. 1, when they sank to the lowest since March 9.

``I am not under the impression that moves have been excessive or unusual,'' Fukui said. ``Markets are constantly reacting to new data as it becomes available and that's a sign the market is functioning properly.''

Since the last Bank of Japan rate decision on Aug. 11 reports have shown a mixed view of Japan's economy. Bank lending grew for a seventh month in August and business spending surged at the fastest pace in almost five years, reports showed this week. In July, factory production, wages and retail sales all declined.

Sustained Growth

``We maintain our outlook for a sustained economic expansion and accelerated rise in prices,'' said Takuji Aida, an economist at Barclays Capital in Tokyo.

The decline in industrial production and less-than-expected inflation rate were influenced by one-off factors, said Aida, who hasn't changed his forecast that the central bank will raise rates every quarter next year.

Consumer prices excluding fresh food under the government's new calculation rose 0.2 percent in July. They would have climbed 0.6 percent under the old method.

About half the gap between the new and the old consumer price calculation reflected changes in the way mobile-phone rates were calculated, and the slowdown won't change the bank's stance, according to Tetsufumi Yamakawa, chief economist at Goldman Sachs Japan Ltd. in Tokyo.

Since the start of the month investors added to bets on another increase by year-end, with yields on three-month Euroyen futures for December delivery rising to 0.575 percent from 0.565 percent yesterday and 0.520 percent a week ago.

Currencies

Fukui said he doesn't expect currencies will be the focus of discussion when the Group of Seven finance ministers and central bankers meet in Singapore this month.

``There's little chance that currencies will be discussed exclusively,'' he said. ``I don't expect the yen to be discussed specifically.''

Finance ministers and central bankers of G-7 countries will meet in Singapore on Sept. 16. Fukui declined to comment on recent moves in the currency market, adding that there's been little change in the yen-euro trade-weighted rate.

The yen jumped against the dollar and euro after German Deputy Finance Minister Thomas Mirow said yesterday the currency's weakness will be discussed.

Six of 15 economists in a Bloomberg News survey conducted from Aug. 31 to Sept. 5 expect the bank to raise rates by 25 basis points before the end of the year.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: September 8, 2006 07:03 EDT