Japan stocks climb on exporter buying, bank recovery

(Updates to midafternoon)

TOKYO Jan 31 (Reuters) - Japanese stocks gained on Thursday, buoyed by short-covering in Toyota Motor Co (7203.T) and other blue-chip exporters, while banks erased nearly all their losses as subprime worries eased slightly. U.S. bond insurer MBIA Inc (MBI.N) said private-equity firm Warburg Pincus completed a $500 million investment in the bond insurer, reassuring investors spooked by tumbling bank shares on Wall Street on fears about a downgrade of bond insurers. The news helped banks erase nearly all their losses, with industry leader Mitsubishi UFJ Financial Group (8306.T) (MUFG) up 0.2 percent compared to a sharp fall during earlier trade. "This has helped boost the market, especially in financials, though the main impetus is from short-covering," said Yutaka Miura, senior technical analyst at Shinko Securities.

"There's really much more of an impact now from things that have a direct impact on the economy, such as the subprime mortgage crisis, rather than financial news such as yesterday's Fed rate cut." Remarks by a CNBC reporter that the two biggest bond insurers may lose their top credit rating came in the last hour of U.S. trading, sending major indexes into negative territory after they had gained earlier on the Federal Reserve's expected 50-basis-point rate cut. [.N]

The negative sentiment carried over into Tokyo trade, initially pushing down banks already made vulnerable by media reports that subprime losses would be larger than originally expected.

These included a Nikkei business daily report that MUFG's subprime-linked losses may grow to some 90 billion yen ($850 million)for the year ending in March.

At 0426 GMT the benchmark Nikkei .N225 was up 1.5 percent at 13,542.37, a gain of nearly 200 points. The broader TOPIX .TOPX was up 1.5 percent at 1,339.86.

Blue-chip exporters fared especially well on short-covering, which market participants said was connected to Thursday's being the last day of the month.

Toyota was up 4.9 percent at 5,790 yen, making it one of the largest contributors to the Nikkei by volume weight, but others also fared well.

Hitachi (6501.T) was up 3 percent at 795 yen and Sony Corp, due to announce earnings later on Thursday, was up 2.8 percent at 5,180 yen.

Terumo Corp (4543.T) rose 10.6 percent to 5,750 yen after it said its nine-month operating profit climbed 16 percent from a year earlier to 52.5 billion yen ($493 million), citing strong sales of medical equipment worldwide.

Merrill Lynch lifted Terumo's rating to "buy" from "neutral", citing its strong results and recent product launches overseas, according to a copy of the report obtained by Reuters.

NTT Data Corp (9613.T), Japan's biggest systems integrator, gained 7.2 percent to 474,000 yen after it posted a 3.9 percent rise in operating profit on demand from domestic banks, and said it was on track to achieve its full-year outlook. (Reporting by Elaine Lies; Editing by)