(Corrects first paragraph to show retail sales report due tomorrow.)

June 26 (Bloomberg) -- The yen may extend gains from a record low versus the euro as a report tomorrow is forecast to show Japanese retail sales accelerated last month, fueling speculation the Bank of Japan might boost borrowing costs.

Japan's currency may gain for a second day versus the dollar for the first time in more than two weeks on speculation investors will pare the so-called carry trades, in which they buy higher-yielding assets overseas funded by loans in the yen. Another report later this week may show Japanese industrial production rose last month after falling in April.

``The yen is going to do fairly well as investors take a bit of risk off the table,'' said Robert Fullem, manager of corporate foreign exchange sales with the Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. ``You need a pickup in the retail sales to stoke the fear of inflation and rising rates.''

The yen traded at 166.49 per euro at 6 a.m. in Tokyo, after rebounding from an all-time low of 166.94 on June 22. The dollar bought 123.66 yen. The U.S. currency traded at $1.3463 per euro.

Retail sales in Japan last month increased 0.4 percent, according to the median estimate of 11 economists surveyed by Bloomberg News. That compares with a revised gain of 0.3 percent in April.

Japan's benchmark interest rate of 0.5 percent is the lowest among major economies. The BOJ hasn't increased rates since February. Policy makers announce their next rate decision on July 12 in Tokyo.

Consumer Prices

Consumer prices will more than double to 0.5 percent this year, from 0.2 percent in 2006, and the economy will grow at the fastest rate in more than 10 years, said Chikahisa Sumi, a Japanese Ministry of Finance official, during a conference on June 22 in New York.

The world's second-largest economy grew at an annualized 3.3 percent rate in the first quarter. Sumi said the annual increase will be 2.2 percent this year, the fastest since 1996.

Consumer prices may have fallen 0.1 percent last month from a year earlier, according to the median forecast of 41 economists in a Bloomberg survey. Data will be released June 29 in Tokyo.

The implied volatility of one-month euro-yen options, a gauge of carry-trade risk, rose 0.5 percentage points yesterday, the most in more than two weeks, to 7.4 percent. Higher volatility makes profits from carry trades more uncertain and may discourage some traders from putting on the positions.

Preliminary manufacturing data may show an increase of 0.9 percent last month, according to the median estimate of 46 economists surveyed by Bloomberg. The gauge declined 0.2 percent in April.

The yen has dropped 11.4 percent versus the New Zealand dollar and 5.6 percent against the euro so far this year. Japan's borrowing costs compare with 8 percent in New Zealand and 4 percent in Europe.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: June 25, 2007 18:20 EDT