Feb. 17 (Bloomberg) -- Japanese stocks fell, paced by property shares such as Mitsubishi Estate Co., on concern an end to a policy of holding interest rates near zero will damp the companies' profits.

``Investors have started selling real estate-stocks on speculation higher interest rates in Japan will hurt their earnings as borrowing costs trim their future profit'' and lower the present value of their future earnings, said Tsuyoshi Shimizu, who helps oversee $16 billion at Dai-Ichi Kangyo Asset Management Co. in Tokyo.

Sony Corp. paced declines after Merrill Lynch & Co. lowered its rating on the world's second-largest consumer electronics maker to ``sell'' from ``neutral.''

The Topix index fell 8.68, or 0.5 percent, to 1622.71 as of the 11 a.m. break in Tokyo. The Nikkei 225 Stock Average dropped 119.06, or 0.7 percent, to 15,924.61.

Shares also fell as investors including Shimizu said a government report on Japan's gross domestic product was within the range of their expectations.

``The GDP figure was within our estimates and there was no surprise there. That lack of surprise may have prompted profit- taking,'' Shimizu said.

A group of property stocks in the Topix has declined for seven of the last eight days. Today, the gauge lost 3.7 percent, the biggest drop among the broad measure's 33 industry groups.

Mitsubishi Estate, Japan's second-largest property developer, dropped 95 yen, or 3.9 percent, to 2,355. Mitsui Fudosan Co., Japan's biggest property developer, declined 85 yen, or 3.6 percent, to 2,275.

Higher Borrowing Costs?

Investors anticipate an end to the Bank of Japan's policy of pumping cash into the economy and an eventual switch to raising interest rates is closer, given the rate of economic expansion, investors including Shimizu and Masaaki Endo at Norinchukin Zenkyoren Asset Management Co. said.

``It's a bit early but investors are already taking the impact of higher borrowing costs on stocks into account,'' said Endo.

Japan's economy expanded at an annual 5.5 percent pace in the three months to Dec. 31, the Cabinet Office said in Tokyo today. GDP expanded a revised 1.4 percent in the third quarter, up from 1 percent. That's five times faster than U.S. growth.

Today's report, combined with rising consumer prices, suggests that the central bank is getting closer to ending its five-year quantitative easing policy of pumping money into the economy and holding interest rates near zero.

Core consumer prices, the central bank's benchmark for conducting monetary policy, will show ``clear gains'' from January, Bank of Japan Governor Toshihiko Fukui said on Feb. 9. The bank next meets on March 8 and March 9.

Drugmakers Drop

Sony, the world's second-biggest consumer electronics maker, fell 120 yen, or 2.1 percent, to 5,540.

Costs to develop the PlayStation 3, which will feature the super-fast Cell chip and high-definition Blu-ray disc player, and slower sales at the finance business may depress earnings at the Tokyo-based company, Hitoshi Kuriyama, a Tokyo-based analyst at Merrill, said.

Eisai Co. Japan's fourth-biggest drugmaker, paced declines by pharmaceutical stocks, falling 230 yen, or 4.3 percent, to 5,170. Teva Pharmaceutical Industries Ltd., the world's biggest generic- drug maker, said yesterday its version of Eisai's indigestion medicine received tentative approval from the U.S. Food and Drug Administration.

Final permission to sell tablets containing the drug's active ingredient, rabeprazole sodium, is expected when a court order protecting Eisai's patent expires in February 2007, Teva said in a statement.

Chugai Pharmaceutical Co., a subsidiary of Basel, Switzerland-based Roche Holding AG, dropped 135 yen, or 5.9 percent, to 2,160. It fell for a second day after Credit Suisse Group yesterday cut its rating on the stock to ``neutral'' from ``outperform.'' The decline was the second-biggest in percentage terms on the Morgan Stanley Capital International World Index in Asian trading.

-- With reporting by Kazue Somiya in Tokyo. Editor: Annells (mas)

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

Last Updated: February 16, 2006 22:23 EST