May 9 (Bloomberg) -- The yen rose for a third day on speculation the Bank of Japan is preparing to lift interest rates after holding borrowing costs near zero for the past five years.
The Japanese currency yesterday reached an eight-month high after Bank of Japan Governor Toshihiko Fukui said policy makers may increase rates on signs of ``sustained'' growth. Expectations of a rise in the key lending rate helped push yields on Japanese government bonds toward the highest in almost seven years.
``As markets anticipate a rate hike it's a much better fundamental backdrop for the yen,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Japanese investor interest in chasing higher yields abroad will be much less this year as Japanese yields go higher.''
The yen traded at 111.23 per dollar at 9:37 a.m. in Tokyo from 111.63 in New York yesterday, when it reached 110.99, the strongest since Sept. 21. The Japanese currency rose to 141.31 per euro from 141.90.
The yen, up 6 percent versus the dollar over the past month, will gain to 108 by year-end, forecast Kyriakopoulos.
The BOJ on March 9 ended a five-year policy of flooding the economy with money to fight deflation, a prelude to raising rates. Seven of 16 economists Bloomberg surveyed last month said the bank may raise its benchmark as early as July.
Traders expect the Fed to raise its key rate to 5 percent tomorrow and then pause, after Chairman Ben S. Bernanke suggested on April 27 the central bank was almost finished in its cycle of increases.
The Bank of Japan is considering upgrading its view on the Japanese economy by using the word ``expansion'' for the first time in more than 14 years, Jiji Press reported today.
The Bank of Japan may approve the more bullish assessment over the current view, which says the economy is recovering, in its monthly report on May 19, Jiji said, citing sources it didn't name.
Yields on 10-year Japanese government bonds have increased to 1.98 percent from 1.47 percent at the start of the year. The yen fell 15 percent in 2005 as an average yield of 1.39 percent helped spur Japanese investors to seek higher returns overseas.
