March 10 (Bloomberg) -- The Bank of Japan will raise its benchmark interest rate from near zero by the end of 2006 after yesterday ending a five-year policy of fighting deflation, according to 16 of 20 analysts surveyed by Bloomberg News.

Governor Toshihiko Fukui and his board colleagues voted at a meeting in Tokyo to cut the cash provided to lenders to about 6 trillion yen ($50.7 billion) from as much as 35 trillion yen over the next few months. Faster growth in the world's second- largest economy may give the central bank room to raise borrowing costs for the first time since August 2000.

``By the end of the third quarter, the beginning of the fourth, the economy will have exhibited a surprising amount of pick-up,'' said Paul Sheard, chief Asia economist at Lehman Brothers Japan Inc. ``That's when the BOJ can move.''

Japan is emerging from deflation as rising wages and unemployment near a seven-year low spur consumer spending, propelling the economy toward the longest expansion since the end of World War II.

``This looks to be a sustained economic recovery,'' Fukui told parliament in Tokyo today. ``Employment conditions are clearly improving and consumption is increasing.''

The $4.7 trillion economy probably grew at an annualized 5 percent pace in the fourth quarter, less than the government's initial estimate of 5.5 percent, according to the median of 18 economists' forecasts in a Bloomberg News survey. The Cabinet Office will release the revised fourth-quarter figure in Tokyo on March 13.

U.S., Europe

Even at a slower rate, Japan's expansion still may have surpassed that of the U.S. and Europe in the final three months of 2005. The U.S. economy grew at a 1.6 percent annualized rate and the dozen nations sharing the euro grew 0.3 percent from the third quarter.

The dollar gained for a second day against the yen as traders bet a report showing quicker U.S. job growth will increase the odds of a rate increase by the Federal Reserve. The dollar traded at 118.40 yen at 6:20 p.m. in Tokyo from 118.21 late yesterday in New York and 116.38 yen on March 3.

The Bank of Japan said in yesterday's statement that it wants to keep gains in consumer prices stable within a range of zero percent to 2 percent. There's no binding inflation target, Fukui said.

Consumer Prices

Japan's consumer prices using the measure indicated by the central bank, which includes fuel and food costs, gained 0.5 percent in January from a year earlier, the first increase in eight months.

Core consumer prices, the indicator which the Bank of Japan has used to judge inflation until now, rose 0.5 percent in January from a year earlier. Last month's gain was the highest in eight years.

Japan's producer prices rose 2.9 percent in February, the fastest pace in 16 years, as fuel and metal costs increased and a weak yen made imported goods more expensive, a central bank report showed today.

The central bank has held interest rates close to zero and pumped cash into the financial system since March 2001 to end deflation. Japan has endured three recessions in the 15 years since its so-called bubble economy burst.

``Japan's inflation won't accelerate this year to the level which would force the Bank of Japan to raise rates,'' said Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute, who expects the bank will hold off raising interest rates until April 2007. ``Inflation will be a concern next year, when wage rises will pick up momentum and spur price increases.''

`Careful Decision'

Iizuka expects the central bank will probably raise rates three times to 0.75 percent by the end of next year.

Japan's Prime Minister Junichiro Koizumi, who earlier this week urged Fukui and his colleagues to ``make a careful decision'' on monetary policy, yesterday said he respected the central bank's announcement.

``I respect the decision given that it was made after thorough discussion at the monetary policy meeting,'' Koizumi said. The inflation range included in the bank's definition of price stability ``was probably a message that the bank wants to continue working with the government to end deflation.''

The government has been concerned a change in policy may result in higher bond yields, increasing interest payments on public debt, which at 150 percent of the economy, is the biggest in the industrialized world. The yield on Japan's 1.6 percent bond due March 2016 rose 5 basis points to 1.65 percent as of 4:03 p.m. in Tokyo.

`Cannot Last'

Fukui told parliament today the central bank plans to keep interest rates near zero for some time even after it changed its monetary policy. Still, he added borrowing costs will eventually need to be adjusted to a level that matches the pace of economic expansion and price gains.

Fukui said the bank will try to raise rates ``as slowly as possible'' because rapid increases could hurt economic growth.

If the Bank of Japan does raise interest rates this year it would be the first year since 2000 in which all three major central banks tighten credit.

The Federal Reserve has raised interest rates 14 times to 4.5 percent and suggested the run of increases is still not finished. The European Central Bank last week lifted its benchmark rate for the second time in three months to 2.50 percent from 2.25 percent.

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Forecaster                    Timing         Increase
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Dai-Ichi Life Institute       2Q 2007        25 bps
Sumitomo-Mitsui Asset         4Q 2006        10 bps
Barclays Capital              BY 4Q 2006     25 bps
Mizuho Securities             NOT IN 2006
Societe Generale              4Q 2006
Nomura Securities Research    BY END 2006
Lehman Brothers               4Q 2006        25 bps
UBS                           BY END 2006    25 bps
Goldman Sachs                 4Q 2006        25 bps
Nikko Citigroup               April 2007     25 bps
Credit Suisse                 NOT IN 2006
BNP Paribas                   4Q 2006
Rabobank                      4Q 2006
Standard Chartered            3Q 2006
RBC Capital Markets           BY END 2006
FTN Financial                 4Q 2006
Bank of America               4Q 2006
JPMorgan Chase & Co           4Q 2006
Brown Brothers Harriman       4Q 2006
Commercial Economics Asia     BY END 2006

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

Last Updated: March 10, 2006 04:22 EST