TOKYO, Feb 20 The dollar edged up against the yen on Tuesday, pulling away from a five-we

TOKYO, Feb 20 (Reuters) The dollar edged up against the yen on Tuesday, pulling away from a five-week low as investors doubted whether a potential interest rate increase by the Bank of Japan would do much to help the beleaguered Japanese currency.

Market players are divided over whether the BOJ will lift rates to a decade-high of 0.5 percent from 0.25 percent at its two-day policy meeting ending on Wednesday after the central bank kept rates steady last month in a split decision.

Swap contracts on the overnight call rate indicate a roughly 60 percent chance of a move, up from a low around 30 to 35 percent last week.

Even if the BOJ lifts rates, investors increasingly believe the yen will still suffer with rates so much higher at 5.25 percent in the United States and 3.5 percent in the euro zone and the BOJ seen waiting a while before tightening policy further.

Japan's ultra-low rates have spurred market players to use the currency as a source of cheap funds to buy higher-yielding currencies in the carry trade and have prompted many domestic investors to seek better returns in foreign assets.

Trading was expected to be quiet, with many markets in Asia closed for the Lunar New Year holidays, while U.S. markets were closed on Monday for Presidents Day.

Currency strategists at RBC Capital Markets said regardless of the whether the BOJ raises rates, they expect the dollar and euro to resume their climb against the yen as carry trades are re-established.

The dollar edged up to 119.70 yen from near 119.54 yen in late London trade, recovering from a five-week low of 118.98 yen struck on Friday. The U.S. currency reached a four-year peak of 122.20 yen in late January.

The euro gained to 157.43 yen from 157.23 yen.

The single currency was little changed at $1.3153 but holding near a six-week high of $1.3173 hit last week.

Since the BOJ scrapped its policy of holding rates at virtually zero, the central bank has held them steady for seven months as the economy has had a tough time pulling out of deflation with core consumer prices barely in positive territory.

Data last week showing the Japanese economy expanded at a robust 4.8 percent annualised pace in the last three months of 2006 has helped keep alive the possibility of a move this week.

The dollar was still feeling the sting from a string of weak economic data last week and comments from Federal Reserve Chairman Ben Bernanke that were seen as suggesting the Fed is more likely to cut rates next than raise them.

By contrast, the European Central Bank and Bank of England are both expected to raise rates further, enhancing the yield appeal of the euro and sterling.

REUTERS PKS VP0640