Feb. 21 (Bloomberg) -- Japan's Topix index climbed to the highest close in more than 15 years. Lenders including Mizuho Financial Group Inc. gained after the Bank of Japan raised the benchmark interest rate to 0.5 percent, enabling them to earn wider margins on loans.

``There are investors who had expected no interest rate increase and they put their money back into banks as beneficiaries of higher rates,'' said Kenji Tomida, who oversees $16 billion as chief fund manager at T&D Asset Management Co. in Tokyo. ``This trend may continue.''

Steelmakers such as Nippon Steel Corp., gained on speculation they will be involved in mergers and acquisitions as the industry consolidates globally.

The Topix rose 4.50, or 0.3 percent, to 1787.23, the highest since Nov. 15, 1991. A measure tracking banks was the largest contributor to the gain. The benchmark dropped as much as 0.2 percent before the central bank decision. The Nikkei 225 Stock Average fell 25.91, or 0.1 percent, to 17,913.21 after declining as much as 0.5 percent prior to the announcement.

Tokyo Electric Power Co. led declines in utility companies on concern higher interest rates increase the cost of their debt.

Mizuho, Japan's second-biggest bank by assets, rose 9,000 yen, or 1 percent, to 883,000, reversing an earlier loss of as much as 0.8 percent. Sumitomo Mitsui Financial Group Inc., the nation's third largest, 10,000 yen, or 0.8 percent, to 1.21 million after falling by as much as 0.8 percent.

A higher benchmark interest rate enables banks to raise their own loan rates and increase profits.

Central bank Governor Toshihiko Fukui and his policy board colleagues voted 8-1 to increase the overnight lending rate from 0.25 percent, the bank said in a statement. The benchmark rate remains the lowest among major economies.

More Steel Mergers?

The central bank said further increases will be gradual and that prolonging a low-interest-rate policy could hamper growth in the world's second-largest economy.

Nippon Steel, Asia's second-biggest maker of the alloy, jumped 20 yen, or 2.6 percent, to 805. Sumitomo Metal Industries Ltd., the nation's third biggest, jumped 23 yen, or 3.9 percent, to 614. Kobe Steel Inc., the fourth largest in the country, rose 10 yen, or 2.2 percent, to 470.

Tokyo-based Nippon Steel surveyed its shareholders as it moves to improve its relationship with investors amid consolidation within the global industry. Company spokesman Hayato Uchida said letters were sent to shareholders last month.

Other Japanese steelmakers may also conduct a similar survey, the Nikkei reported earlier.

``I think steelmakers still have room to gain, supported by both reorganization speculation and their earnings outlook,'' said Junichi Misawa, who oversees $655 million in funds at STB Asset Management Co. in Tokyo.

Power Companies Drop

Crude steel production in Japan increased for an eighth straight month in January to 10.07 million metric tons, on demand from manufacturers and automobile makers, the Japan Iron & Steel Federation said yesterday.

Tokyo Electric Power, Asia's biggest generator, dropped 90 yen, or 2.2 percent, to 4,100. Kansai Electric Power Co., the nation's second-largest, slid 60 yen, or 1.7 percent, to 3,500.

``Any interest-rate increase raises costs for companies such as power producers that have a lot of debt on their balance sheets. It will be bad for their stocks,'' said Masaru Hamasaki, a senior analyst at Toyota Asset Management Co. in Tokyo.

Canon Inc., the world's biggest digital camera maker, dropped 150 yen, or 2.3 percent, to 6,470. Honda Motor Co., Japan's second-biggest automaker by sales, declined 60 yen, or 1.3 percent, to 4,620.

Canon made around 75 percent of its sales outside Japan and Honda made almost 80 percent of its total sales overseas last business year.

Yen Trend Unclear

The yen strengthened to as high as 119.71 a dollar in Tokyo from as weak as 120.53 after NHK television reported Fukui proposed a interest rate increase. It recently slipped to 120.42 after the central bank said it will lift borrowing costs gradually.

T&D's Tomida said the direction of a Japanese currency is still not clear before traders and investors outside Japan react to today's rate increase.

A stronger Japanese currency means the nation's exporters get less for their overseas sales when they are converted back to yen while their products become less competitive.

Nikkei futures expiring in December lost 0.2 percent to 17,930 in Osaka and slipped 0.1 percent to 17,935 in Singapore.

Canon Inc. (7751 JT)
Honda Motor Co. (7267 JT)
Kansai Electric Power Co. (9503 JT)
Kobe Steel Ltd. (5406 JT)
Mizuho Financial Group Inc. (8411 JT)
Nippon Steel Corp. (5401 JT)
Sumitomo Metal Industries Ltd. (5405 JT)
Sumitomo Mitsui Financial Group Inc. (8316 JT)
Tokyo Electric Power Co. (9501 JT)

To contact the reporter for this story: Makiko Suzuki in Tokyo at msuzuki13@bloomberg.net.

Last Updated: February 21, 2007 03:46 EST