* Retail investors pick up underperformers such as Sharp, TEPCO * Sony Financial falls after earnings guidance disappoints * SoftBank slips, Sprint permitted discussions with Dish By Dominic Lau TOKYO, May 21 (Reuters) - Japan's Nikkei share average hit a 5-1/2-year high on Tuesday, reversing earlier losses as retail investors scooped up underperforming stocks such as Sharp Corp and Tokyo Electric Power Co Inc. By the midday break, the Nikkei inched up 0.1 percent to 15,369.13 after trading as high as 15,388.37, its best mark since December 2007. The index was down as much as 0.6 percent earlier in the session on profit-taking after Wall Street finished flat. "Institutional investors are actually rather quiet today. It seems to be more retail-investor-driven today," a senior trader at a foreign bank said. "A lot of the laggards in the once hated stocks, like Sharp, TEPCO, Mitsubishi Motors, Kobe Steel and Tokuyama, are up on double-digits." Sharp, TEPCO, Mitsubishi Motors Corp, Kobe Steel Ltd and chemical manufacturer Tokuyama Corp soared between 11.7 and 21.2 percent. Tepco was the most traded stock on the main board by turnover, followed by Sharp and Mitsubishi Motors. The benchmark Nikkei has rallied nearly 48 percent this year on the back of aggressive government and central bank policies to revive the economy, and it has risen more than 8 percent since May 9, when the dollar broke above the 100-yen mark. The yen last traded at 102.53 to the dollar on Tuesday, rebounding from a 4-1/2-year low of 103.32 hit on Friday. Japanese shares carry a 12-month forward price-to-earnings ratio of 15.9, a level not seen since May 2010 but still below its 10-year average of 16.3, data from Thomson Reuters Datastream showed. "One recent trend is that investment trusts are big buyers in the market," said Jun Yunoki, an analyst at Nomura Securities. "As the market is going up, the momentum is gaining for them to invest in Japanese stocks." Another trader said many investors were focusing on the Bank of Japan's two-day meeting, which concludes on Wednesday. The central bank is expected to stand pat on monetary policy, but it may seek ways to calm the bond market over the recent volatility it has experienced. The broader Topix index gained 0.3 percent to 1,272.66 in active trade, with volume at 93 percent of its full daily average for the past 90 trading days. As stocks rallied, the spread between Topix's dividend yield and the 10-year Japanese government bond yield narrowed to 0.70 percent on Monday, a level not seen since April 2011, according to Datastream. Other notable movers on Tuesday included SoftBank Corp , down 3 percent. U.S. wireless operator Sprint Nextel Corp said it has received a waiver from SoftBank allowing it to engage with Dish Network Corp in discussions over a proposed offer, although Sprint said its recommendation in favour of the SoftBank offer has not changed. Sony Financial Holdings Inc dropped 2 percent after it forecast a net income of 37 billion yen for the current business ending March 2014, below an average of 43.05 billion yen from 11 analysts polled by Thomson Reuters I/B/E/S.