Nikkei hits 5-1/2-year closing high helped by yen

TOKYO, Mar 29 (Reuters) The Nikkei average posted its highest close since August 2000 on Wednesday as the yen's fall against the dollar fuelled expectations for higher earnings at export-oriented manufacturers such as Sony Corp Fanuc Ltd. and other machinery firms also gained, wiping out the negative impact from a fall in U.S. stocks after the Federal Reserve hinted at further interest rate increases and decided on a quarter-percentage-point rise on Tuesday as expected.

Also behind a pickup in Tokyo market momentum were expectations Japanese institutional investors will have fresh money for stocks once Japan's fiscal year starts on April 1.

''Domestic investors underweight on Japanese stocks are highly likely to enter the market from April,'' said Teruhisa Ishikawa, manager at Mizuho Investors Securities' investment information department.

''Economic fundamentals and earnings prospects are good at home. It wouldn't be surprising if the Nikkei cleared the 17,000 level in the near future,'' he said.

The Nikkei rose 1.49 per cent or 248.17 points to 16,938.41, its highest close since Aug. 29, 2000.

The broader TOPIX index was up 1.11 per cent at 1,711.54, its highest finish since Feb. 7.

The technology-sensitive Nikkei has been lagging behind the TOPIX in the past few months as investors preferred domestic plays, such as real estate and brokerage shares.

Yoshinori Nagano, chief strategist at Daiwa Asset Management, said Japanese stocks look expensive when compared with U.S. and European shares, though they are still worth buying.

''It's still comfortable to buy them now that the market expects a 5 to 10 per cent rise in earnings in the year from April against the backdrop of strength in the U.S. and Japanese economies. That would result in price-to-estimated-earnings multiples of below 20,'' Nagano said.

According to Reuters data, the average price to earnings ratio of the Nikkei 225 component stocks was around 25, versus 17 for that of the Standard&Poor's 500 index and 13 for the FTSE 100 index HIGHER DOLLAR SUPPORTIVE In the first Fed meeting since Ben Bernanke took over as chairman, the Federal Open Market Committee voted on Tuesday to lift the benchmark fed funds rate to 4.75 per cent.

The yen fell nearly 1 per cent after the Fed move on Tuesday, booking its biggest one-day fall against the dollar since December. The dollar was at 117.80 yen a tad below its New York close.

Nikko Citigroup strategist Tsutomu Fujita said a further rise in U.S. interest rates would have a positive, albeit indirect, impact on the Japanese equities market, given chances that the U.S. economy will remain firm even if the fed funds rate rises to 5 per cent by June.

''A brisk U.S. economy and appropriate rises in interest rates are likely to buoy the dollar, giving Japanese stocks an additional boost,'' Fujita said in a report on Wednesday.

''In particular, we anticipate a clear positive impact in process-based manufacturing industries including autos, auto parts, electricals, precision equipment and machinery,'' he said.

A higher dollar helps inflate profits that exporters earn from abroad when repatriated into the yen.

Sony rose 1.9 per cent to 5,370 yen and Matsushita Electric Industrial Co. Ltd., the maker of Panasonic products, gained 2.3 per cent to 2,635 yen.

Advantest Corp., the world's biggest supplier of microchip-testing devices, added 3.9 per cent to 13,900 yen.

Industrial robot maker Fanuc, which makes more than 60 per cent of its sales overseas, gained 3.8 per cent to 11,260 yen.

Komatsu Ltd., the world's No.2 construction machinery maker after Caterpillar Inc., hit a lifetime high of 2,220 yen. Komatsu ended up 4 per cent at 2,205 yen.

Electronics machinery maker Dainippon Screen Manufacturing Co. Ltd. climbed 7.4 per cent to 1,235 yen, extending gains since it revised up its earnings forecasts for 2005/06.

Shares in Internet portal Yahoo Japan Corp. jumped 7.6 per cent to 71,100 yen after sources said it would ally with Sumitomo Mitsui Financial Group to take a stake in the bank's online subsidiary, Japan Net Bank.

Sumitomo Mitsui, Japan's third-biggest banking group, was up 0.8 per cent at 1.25 million yen.

The Tokyo exchange saw its busiest day of trade in a week, with 1.97 billion shares changing hands on the first section.

Advancers beat decliners by a ratio of more than 3 to 1.

REUTERS SD HT1442