Nikkei up 1.7 pct on yen, receding inflation fears

*Nikkei up 1.7 percent, at highest level in over a week

*Exporters gain as yen weakens, inflation concerns ease

*Banks climb on short-covering amid overall market rise (Adds stocks and comments)

By Aiko Hayashi

TOKYO, Aug 11 (Reuters) - The Nikkei average rose 1.7 percent on Monday, boosted by Honda Motor Co (7267.T) and other exporters on a softer yen and easing worries about inflation and corporate profits after a recent fall in oil prices.

Japan's top three banks gained on short-covering amid improving investor confidence in the market.

"A softer yen and receding inflation worries, which helped retailers and manufacturers overseas, are pushing up stocks here," said Takahiko Murai, general manager of equities at Nozomi Securities.

"But the yen has gotten a bit stronger in early Tokyo time and that may limit further gains."

The benchmark Nikkei .N225 added 225.96 points to end the morning session at 13,394.37, hitting its highest point since July 31.

The broader Topix gained 1.3 percent to 1,276.24.

A reported comment by a top ruling party official backing a dividend tax exemption also helped improve market sentiment, said Katsuhiko Kodama, senior strategist at Toyo Securities.

Taro Aso, secretary general of the Liberal Democratic Party, proposed an expansion of tax incentives on stock investments, including an exemption on dividend income up to 3 million yen ($27,190), Jiji news agency said on Saturday. [ID:nT1721]

The dollar traded at around 109.78 yen JPY=, after having earlier hit its highest for the year at 110.36 yen. Investors welcome a softer yen as it helps boost exporters' overseas profits when they are brought back home.

EXPORTERS, BANKS GAIN

Shares of Honda jumped 4.9 percent to 3,640 yen to become the top positive contributor to the Nikkei 225.

Canon Inc (7751.T) climbed 3.1 percent to 5,270 yen and Sony Corp (6758.T) gained 2.8 percent to 4,380 yen.

Toyota Motor Corp (7203.T) advanced 3.5 percent to 5,000 yen. The Nikkei business daily reported on Monday that the world's biggest carmaker is set to raise prices of hybrid cars and commercial vehicles by 1-3 percent in Japan as costs for steel and other materials soar. [ID:nT35288]

Top lender Mitsubishi UFJ Financial Group (8306.T) gained 2.8 percent to 869 yen and No.2 Mizuho Financial Group (8411.T) rose 1.3 percent to 474,000 yen. Sumitomo Mitsui Financial Group (8316.T), Japan's third-biggest bank, added 0.6 percent to 706,000 yen.

But Nozomi Securities' Murai warned that their gains may not last as Japan's slowing economy hurts profitability.

"Their recent earnings results have shown net profits at their core businesses declined as the economy is getting worse... Bad loans from mid- to small-sized companies are on the rise," he said.

Shares of Hitachi Zosen Corp (7004.T) soared 11.2 percent to 119 yen.

The machinery and engineering firm said its operating profit jumped 3.7 times to 1.8 billion yen for the three months ended in June, buoyed by strong sales growth in ship engines and pressure containers for oil refineries.

Trade was light on the Tokyo exchange's first section, with 851 million shares exchanging hands, compared to last week's morning average of 1 billion.

Advancing stocks outpaced decliners by a ratio of about 2 to 1. (Reporting by Aiko Hayashi; Editing by Edwina Gibbs)