March 30 (Bloomberg) -- The yen may gain for a second day on speculation a government report tomorrow will show prices rose for a fourth month, reinforcing expectations the Bank of Japan will push up interest rates in the second half of the year.

The Bank of Japan has vowed it won't raise borrowing costs from almost zero percent until core prices stop falling for at least a few months, signaling an end to seven years of deflation. Three months of inflation through January supported the yen, ending four quarters of losses against the dollar. The yen had little reaction to a government report showing industrial production unexpectedly fell last month.

``Creeping inflation suggests the BOJ won't keep rates at zero for an indefinite period, which will support the yen,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``The industrial production data don't change the story that Japan's economy is recovering.''

The yen traded at 117.71 against the dollar at 10:48 a.m. in Tokyo, from 117.82 in late New York yesterday, little changed for the year. Versus the euro it was at 141.79 from 141.66. The dollar traded at $1.2045 per euro from $1.2024, a loss of 1.7 percent year-to-date.

The yen will climb to 113 against the dollar by mid-year, said Kyriakopoulos.

So-called core prices, which exclude fresh food, last month climbed 0.6 percent from a year earlier after a 0.5 percent gain in January, according to the median estimate of 35 economists surveyed by Bloomberg News. Prior to November, prices had fallen or remained unchanged every month since April 1998.

No Great Worry

The Bank of Japan March 9 announced it was phasing out the amount of cash it injects into the banking system, trailblazing a rise in interest rates. Expectations of higher borrowing costs have pushed five-year government bond yields to their highest since 2000.

Production fell a seasonally adjusted 1.7 percent in February, the Ministry of Economy, Trade and Industry said in Tokyo, as companies scaled back output from record levels. The median estimate of 38 economists surveyed by Bloomberg News was for a 0.1 percent increase from January. From a year ago, production increased 3.7 percent. Output will rise 0.3 percent in March and 3.1 percent in April, the government said.

A BOJ report April 3 will probably show the quarterly Tankan survey increased to 23 points in March from 21 in December, the highest since September 2004, according to the median forecast of 26 economists in a Bloomberg News survey. A positive number means optimists outnumber pessimists.

The production figures ``were a small worry for the Japanese economy, but not a great worry,'' said Masaki Fukui, a senior market economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second largest lender by assets. ``Investors care more about the consumer price index tomorrow and Tankan data on Monday,'' which may push the yen to 116 against the dollar, he said.

Policy Firming

The U.S. dollar may be supported by expectations the Federal Reserve will keep raising interest rates, increasing returns on assets such as U.S. Treasuries.

The Fed two days ago raised its key lending rate a 15th straight time to 4.75 percent and said ``some further policy firming may be needed'' in an accompanying statement.

U.S. interest-rate futures show traders have priced in a 93 percent chance of a rate increase on May 10, up from 76 percent before the meeting. The odds of another move on June 29 are about 22 percent.

``The full interest-rate differential isn't priced into the dollar,'' said Tim Mazanec, a senior foreign-exchange strategist in Boston at Investors Bank & Trust Co. ``The Fed hasn't paused yet and I don't think they will pause anytime soon.''

Repatriation

The yen also may gain on speculation Japanese investors will keep money at home after bringing back cash to meet the deadline for the financial year-end tomorrow.

In three of the past four years the yen has risen in March as Japanese fund managers sell some of their foreign holdings at the end of the financial year to boost their balance sheets.

Japanese investors were net sellers of 720.5 billion yen ($6.12 billion) of overseas bonds, short-term notes and stocks during the week ended March 25, following 1.48 trillion yen in the week ended March 18, the Ministry of Finance said in Tokyo.

``There's some evidence that Japanese investors are increasing their allocations into domestic assets,'' said Ashley Davies, a currency strategist at UBS AG in Singapore. ``We remain bullish the yen.''

The yen will rise to 116 per dollar in one month and 113 in three months, forecast UBS. Investors should probably wait until after the Tankan survey is released on April 3 before buying the yen, Davies said.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net;

Last Updated: March 29, 2006 20:50 EST