Aug. 19 (Bloomberg) -- The yen hovered near a three-week high versus the dollar in Asia as the Nikkei 225 Stock Average gained for a third day, raising speculation demand from overseas investors will increase.

Japan's growth will probably quicken in the second half of the financial year on rising exports, capital expenditure and consumer spending, said economists, who boosted forecasts for growth to the fastest pace in almost a decade. The Nikkei 225 Stock Average has rallied from a three-month low on Monday.

``A rebound in the Nikkei is a plus for the yen,'' said Minoru Shioiri, senior manager of treasury and foreign exchange in Tokyo at Mitsubishi Securities Co. ``The stock market recovery will help overseas investors hold onto their Japanese shares, keeping yen selling at bay.''

Against the dollar, the yen traded at 109.56 at 1:48 p.m. in Tokyo from 109.33 late yesterday in New York, according to electronic currency-trading system EBS. The Japanese currency was also at 135.24 per euro from 134.88. The yen may rise to 109 per dollar today, Shioiri said.

The yen has gained 2.4 percent from a two-week low of 112.10 on Friday when Japan's Cabinet Office said the world's second- largest economy grew at an annual 1.7 percent pace in the April- June quarter. Japan's growth expanded slower than the U.S. economy for the first time in three quarters.

The world's second-biggest economy will probably grow 3.6 percent in the year ending March 31, according to the median of 12 forecasts compiled by Bloomberg News. As of June, their median forecast stood at 3.2 percent.

More than a third of global investors picked Japan as the region with the most favorable corporate earnings prospects in a Merrill Lynch & Co. survey this month.

Not Right

The yen may weaken as crude oil futures rose to a record, renewing speculation higher energy prices will slow the world's second-largest economy.

Japan, the world's largest consumer of crude after the U.S. and China, imports almost all its oil, which rose as high as $47.50 a barrel, heading for an eighth week of gains.

``It doesn't seem right to buy the yen when oil is rising in this magnitude,'' said Tsutomu Soma, a trader of currencies and derivatives in Tokyo at Okasan Securities Co.

Japan's economy will be able to manage rising oil prices, though sharp increases could be a worry, said Hiroyuki Hino, director of the International Monetary Fund's regional office for Asia and the Pacific.

`Pose Concern'

``The GDP figures last quarter were certainly below expectations and sharp increases in oil prices also pose a concern,'' Hino said in an interview in Tokyo. ``Fundamentally, as long as the economy continues to hold up, we see the impact as manageable.''

Japan's currency is 0.7 percent lower since the end of June, when oil prices began surging. A 10 percent increase in the price of oil prompts a 6 percent gain in the dollar against the yen, according to Standard Chartered Bank research based on 30 years of data.

Demand for the dollar may drop on speculation a report from the Federal Reserve may show manufacturing in the Philadelphia region fell, days after a similar gauge in the New York area dropped to the lowest in more than a year.

`No Support'

Job growth slowed for a fourth month in July and consumer prices fell for the first time in eight months, reports showed this month, after Fed Chairman Alan Greenspan said on July 20 a slowdown in spending ``should prove short-lived.''

``I don't see any immediate support coming for the dollar,'' said Shimpei Uike, who invests in overseas debt for Asahi Life Asset Management in Tokyo, with the equivalent of $10.5 billion. ``We haven't seen economic data clearing uncertainties over the course of the U.S. economy.''

The dollar traded at $1.2344 against the euro from $1.2336 in New York yesterday. It may drop to $1.25 this month, Uike said.

The Philadelphia Fed manufacturing index probably dropped to 30 from 36.1 in July, according to the median of 52 forecasts in a Bloomberg News survey. The yen also may strengthen after a government report showed overseas investors increased their purchases of Japanese stocks last week, a ninth week of net buying in the past 10.

Investors outside Japan bought a net 64.6 billion yen ($590 million) of shares during the week ended Friday, following a net purchase of 53.8 billion yen in the prior seven days, the Ministry of Finance in Tokyo said.

`Popularity'

More than a third of global investors picked Japan as the region with the most favorable corporate earnings prospects in a Merrill Lynch & Co. survey this month, when share prices have fallen in the U.S., Europe and Japan.

The Nikkei dropped 2 percent last week, falling for a third week in four. It has added 0.9 percent this year. The Dow Jones Industrial Average of the U.S. has declined 3.5 percent and Germany's DAX Index has shed 6 percent in 2004.

The report ``probably reflects the popularity the Japanese stock market enjoys, compared with its counterparts in places like the U.S.,'' Xinyi Lu, chief investment strategist in Tokyo at UFJ Bank Ltd, said before the release.

In other trading, the British pound bought $1.8242 from $1.8238. The Swiss franc was at 1.2448 from 1.2445.

To contact the reporter on this story: Taizo Hirose in Tokyo at hirose2@bloomberg.net

Last Updated: August 19, 2004 00:49 EDT