Nov. 21 (Bloomberg) -- The Bank of Japan reiterated plans to raise interest rates ``gradually,'' keeping pace with inflation and growth in the world's second-largest economy, minutes of a policy board meeting held last month show.

Members of the policy board ``agreed that the economy was likely to continue to expand moderately,'' according to the minutes of the Oct. 12-13 board meeting released today in Tokyo. The bank will raise the key rate, the lowest among major countries, as long as the economy and prices meet its forecast.

Board members said the bank must communicate with investors closely to explain its stance on economic conditions as they sometimes interpret data differently. A majority of economists expect the central bank to raise interest rates next quarter to prevent excessive business investment and asset bubbles.

``The Bank of Japan wants to raise rates with the smallest possible gap between their economic view and the market's view,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. ``They're aware that their view is currently too different.''

The yen was little changed, trading at 118.10 per dollar at 4:40 p.m. in Tokyo compared with 118.15 before the minutes were published.

Of 16 economists surveyed by Bloomberg News last week, 10 said the bank will raise the key rate in the first quarter of 2007. Four economists said an increase could come at the next two-day policy meeting ending on Dec. 19.

Bank of Japan Governor Toshihiko Fukui said this month that the bank needs to act ``in advance'' to prevent capital spending from overheating and to cool real estate investment.

Divergent Views

The nine-member board said volatility in some economic indicators may cause a divergence in the outlook held by investors and policy makers.

``A temporary swing of an indicator could cause the market and the bank to have different views on economic activity and prices,'' the minutes said. ``Members reaffirmed the importance of explaining thoroughly to the market and the public its assessment of economic and financial developments and its basic thinking about the conduct of monetary policy.''

Japan's economy grew at twice the expected pace in the third quarter, led by corporate spending and exports. Business investment is ``likely to keep increasing, reflecting the continuing growth in domestic and external demand and the high level of corporate profits,'' members agreed.

``The BOJ wants to raise rates soon because they think the current level doesn't match economic conditions,'' Shiraishi said. ``They want to avoid possible overheating of capital spending.''

Land Prices

The most recent Tankan business survey last month showed Japan's largest companies plan to increase spending by 11.5 percent in the year ending March, the fastest pace in 16 years.

Deputy Governor Toshiro Muto said there is a need to watch land prices in Japan as some data show prices in metropolitan areas are increasing, Jiji Press reported in an interview published today.

Land prices in the three biggest cities of Tokyo, Osaka and Nagoya this year rose for the first time since 1990, with some prices in the capital increasing as much as 30 percent.

Policy makers agreed that the benefits of corporate sector strength was spreading to households, though some members said the transition was ``relatively slow.''

Consumer spending is ``likely to continue to increase steadily, mainly reflecting the gradual increase in household income,'' members agreed, attributing weak spending data to ``temporary factors such as bad weather.''

Consumer Prices

Consumer spending, which accounts for more than half of the economy, fell the most in almost two years in the third quarter. Economic and Fiscal Policy Minister Hiroko Ota today said she's concerned about weak consumption.

A few members said consumer sentiment has ``barely improved and there was a polarization of sales toward expensive goods and low-priced goods.''

Consumer prices will probably keep rising, members said, though they expect the pace of increases in producer prices -- the amount companies pay for energy and raw materials -- to slow.

Core consumer prices, which exclude fresh food and are the bank's preferred measure of inflation, rose 0.2 percent in September from a year earlier, slowing from a 0.3 percent gain in August. Producer prices rose 2.8 percent in October, the slowest pace in six months.

One member said the drop in crude oil prices might push down gains in core consumer prices ``earlier than expected,'' the minutes show. The price of Dubai crude oil, the benchmark for Asian refiners, has declined 22 percent since reaching a peak of more than $72 on July 17.

BOJ's Outlook

``The minutes certainly don't imply an early rate increase, so it looks like we're back to the scenario where the next rate increase is before the fiscal year ending in March,'' said Hideaki Furumaya, foreign exchange team manager at Trust and Custody Services Bank Ltd. in Tokyo.

Policy makers estimate core consumer prices will climb 0.5 percent in the year ending March 31, 2008. The economy will grow 2.1 percent next fiscal year after expanding 2.4 percent this year, they said in a semi-annual outlook report last month.

The central bank raised the key overnight loan rate to 0.25 percent from almost zero in July, its first increase since August 2000. Policy makers left rates on hold at the conclusion of their most recent meeting on Nov. 16.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

Last Updated: November 21, 2006 02:43 EST