Nov. 9 (Bloomberg) -- The Bank of Japan will probably refrain from raising interest rates next week amid concern that economic growth will slow and financial markets remain volatile.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Nov. 13, according to all 37 economists surveyed by Bloomberg News.

Japan's economy may lose steam as housing starts slump, record oil prices squeeze profits and the U.S. subprime mortgage collapse threatens exports and shakes markets. The chance of a rate increase this year is virtually nil even as Fukui warns that borrowing costs must rise to prevent excessive investment, said Yasunari Ueno.

``A rate hike is shelved for this year at least,'' said Ueno, chief market economist at Mizuho Securities Co. ``We expect policy action in January, but the probability is less than 60 percent, given domestic and overseas downside risks.''

Only four of 34 economists who gave predictions through Dec. 31 said the bank may raise the key rate, the lowest among major economies, this year.

Japan's Topix stock index yesterday had its worst performance since August, after the dollar slumped against the yen and subprime loan-related losses at U.S. financial companies sent stocks tumbling in the world's biggest economy. The Topix was little changed at 1,517.01 as of 9:21 a.m. in Tokyo.

Federal Reserve Chairman Ben S. Bernanke said yesterday that the U.S. economy is likely to ``slow noticeably'' this quarter while high commodity prices and the weaker dollar may stoke inflation. The U.S. is Japan's biggest export market.

Third-Quarter Growth

The Japanese economy probably grew an annualized 1.9 percent in the three months ended Sept. 30 from a 1.2 percent contraction in the previous quarter, according to the median estimate of 26 economists surveyed by Bloomberg News. The Cabinet Office will publish the growth data on Nov. 13 at 8:50 a.m. in Tokyo, a few hours before the bank's policy announcement.

``A third-quarter rebound alone will hardly guarantee the economy is rejuvenating,'' said Ryutaro Kono, chief economist at BNP Paribas in Tokyo, who predicts growth will slow to less than 1 percent this quarter. ``The housing investment slump will continue to drag down the economy in the fourth quarter.''

Japan's housing starts plunged 44 percent to the lowest level in four decades in September, as stricter rules made it harder to obtain building permits, causing delays.

Bank of Japan policy makers last week cut their growth forecast for the year ending March to 1.8 percent from 2.1 percent, in part because of the housing fiasco. They kept the estimate of next fiscal year's expansion at 2.1 percent.

Recession Odds

Goldman Sachs Group Inc. this week pushed back its prediction of the next rate increase to the third quarter of 2008 from the first three months and said there's a 40 percent chance of a recession.

``The economy will approach the danger zone if the inventory adjustment chiefly in construction-related goods grows while consumer sentiment remains stagnant for the next couple of quarters,'' said Tetsufumi Yamakawa, a former central bank official and now chief economist at Goldman Sachs in Tokyo.

Fukui this week said ``downside risks'' for the economy are rising as fallout from the U.S. mortgage crisis lingers. Still, he added, Japanese lenders remain willing to provide credit and neglecting the risk of keeping rates low for too long would lead to ``a big policy mistake.''

`Strong Commitment'

``Governor Fukui has signaled that his commitment to normalizing interest-rate policy is pretty strong,'' said Akio Makabe, professor of economics at Shinshu University in Nagano, central Japan. ``The bank will seize the opportunity to raise rates as soon as markets stabilize, but I don't think it'll happen before February.''

Crude oil prices, which surpassed $98 a barrel for the first time this week, are boosting manufacturing costs and squeezing profits. The bank said last week that competition is making it difficult for companies to pass on higher costs to shoppers, and that's preventing consumer prices from rising.

Still, Fukui said core prices will resume gaining ``before long.'' Consumer prices excluding fresh food will climb 0.4 percent next year after being unchanged this year, policy makers said in the outlook.

``Recent increases of energy prices make it almost certain that core prices will resume rising by the end of this year,'' said Teizo Taya, a former Bank of Japan policy maker and now adviser to the Daiwa Institute of Research. A rate increase this year can't be ruled out completely, Taya said.

===========================================================
As of 11/09/07           BOJ     BOJ     BOJ     BOJ     BOJ
                        Rates   Rates   Rates   Rates   Rates
===========================================================
Date of Release         11/13   12/20   01/22   02/15   03/07
Time period             2007    2007    2008    2008    2008
Measure                   %       %       %       %       %
-----------------------------------------------------------
# of replies             37      34      32      29      24
Median Forecast         0.50%   0.50%   0.50%   0.75%   0.75%
% Forecast at Median   100.0%   88.2%   75.0%   48.3%   58.3%
Average Forecast        0.50%   0.53%   0.56%   0.64%   0.67%
Expected change         0.00%   0.00%   0.00%   0.00%   0.00%
High Forecast           0.50%   0.75%   0.75%   1.00%   1.00%
Low Forecast            0.50%   0.50%   0.50%   0.50%   0.50%
Previous forecast       0.50%   0.50%   0.50%   0.75%   0.75%
===========================================================
As of 11/09/07           BOJ     BOJ     BOJ     BOJ     BOJ
                        Rates   Rates   Rates   Rates   Rates
===========================================================
-----------------------------------------------------------
ABN Amro Sec.           0.50%   0.50%   0.50%   0.75%   0.75%
Action Economics        0.50%    ---     ---     ---     ---
Aletti Gestielle        0.50%   0.50%   0.50%   0.50%   0.50%
BNP Paribas             0.50%   0.50%   0.50%   0.50%   0.50%
Bank of America         0.50%   0.50%   0.50%   0.75%   0.75%
CFC Seymour             0.50%   0.50%   0.75%   0.75%   0.75%
Capital Economics       0.50%   0.50%   0.50%   0.75%   0.75%
Commerzbank             0.50%   0.50%   0.50%   0.50%   0.75%
Credit Suisse           0.50%   0.50%   0.50%   0.50%   0.50%
DBS Group               0.50%   0.75%   0.75%   0.75%   0.75%
DZ Bank                 0.50%   0.50%   0.50%   0.50%   0.75%
Daiwa Research Inst.    0.50%   0.75%    ---     ---     ---
Daiwa Sec SMBC          0.50%   0.50%   0.75%   0.75%   0.75%
Deutsche Bank           0.50%    ---     ---     ---     ---
Dun & Bradstreet        0.50%    ---     ---     ---     ---
Forecast                0.50%   0.50%   0.50%   0.50%   0.50%
Goldman Sachs           0.50%   0.50%   0.50%   0.50%   0.50%
HSBC                    0.50%   0.50%   0.50%   0.75%    ---
Helaba                  0.50%   0.50%   0.50%   0.50%   0.75%
Intesa Sanpaolo         0.50%   0.50%   0.50%   0.50%   0.75%
J.P. Morgan             0.50%   0.50%   0.50%   0.75%    ---
Lloyd's TSB             0.50%   0.50%   0.50%   0.75%   0.75%
Macquarie Securities    0.50%   0.75%   0.75%   0.75%   0.75%
Merrill Lynch           0.50%   0.50%   0.50%   0.50%   0.50%
Mitsubishi UFJ Sec. BCR 0.50%   0.50%   0.50%   0.50%   0.50%
Mitsubishi UFJ Sec      0.50%   0.50%   0.50%   0.50%   0.50%
Mizuho Securities       0.50%   0.50%   0.75%    ---     ---
Morgan Stanley          0.50%   0.50%   0.75%    ---     ---
Nikko Citigroup         0.50%   0.50%   0.50%   0.50%   0.50%
Nomura Securities       0.50%   0.50%   0.50%   0.75%    ---
Norinchukin Research    0.50%   0.50%   0.50%   0.50%   0.75%
Penrich Capital         0.50%   0.75%   0.75%   1.00%   1.00%
RBS Securities          0.50%   0.50%   0.50%   0.75%    ---
Shinshu Univeristy      0.50%   0.50%   0.50%   0.75%    ---
Standard Chartered      0.50%   0.50%    ---     ---     ---
Totan Research          0.50%   0.50%   0.75%    ---     ---
Westpac                 0.50%   0.50%   0.50%   0.75%   0.75%
===========================================================

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: November 8, 2007 19:35 EST