Japan's Nikkei up more than 1 pct, eyes on yen

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By Elaine Lies

TOKYO, March 18 (Reuters) - Japan's benchmark Nikkei average rose more than 1 percent on Tuesday, buoyed by gains in Canon Inc (7751.T) and other exporters as the dollar held above a 13-year low versus the yen, but gains were limited ahead of a Federal Reserve board meeting later in the day.

Banks battered by Monday's tumble, which took stocks down nearly 4 percent to a fresh 2-½ year low, were higher, with top lender Mitsubishi UFJ Financial Group (8306.T) up 3.3 percent. Other financials also gained.

But the advance was expected to be checked ahead of the Fed meeting and amid worries about forthcoming earnings of U.S. financial firms such as Lehman Brothers LEH.N after the fire sale of Bear Stearns BSC.N.

Despite Tuesday's rise, the Nikkei is still down 22 percent so far this year and remains extremely vulnerable to any advance of the yen against the dollar, market players said.

The dollar was above 97 yen after earlier falling below that level, but still held above a nearly 13-year low hit on Monday. JPY=

"Given the situation, nobody really wants to buy actively. All we're seeing is some short-covering," said Hiroaki Osakabe, a fund manager at Chiba Asset Management.

"There's worries about what this week's U.S. financial company earnings will show. If they're bad, the markets could become even more nervous than they are now."

The benchmark Nikkei .N225 was up 1.5 percent at 11,959.56 by midsession, a day after falling to its lowest close since August 2005. The broader TOPIX was up 1 percent at 1,160.67

After the morning session ended, a ruling party lawmaker said the Japanese government had nominated Koji Tanami, a former top finance ministry official, to head the Bank of Japan a day before incumbent Toshihiko Fukui steps down.

"There's no question that not having decided a new BOJ leader is embarrassing for Japan, but just putting forth a name doesn't mean that much -- after all, this doesn't tell us what sort of policies the bank will adopt," Osakabe said.

"But once this is settled, that's one negative factor removed, so in that sense it'll be a relief."

BANKS HIGHER, EXPORTERS BUOYED

Financials climbed after being hit hard recently, but market participants remained wary.

"We're just seeing a bit of short-covering, only a short-term rebound. The longer-term fate of the Nikkei is really bound up with the yen," said Yumi Nishimura at Daiwa Securities SMBC.

Millea Holdings (8766.T), Japan's largest non-life insurer, was up 5.6 percent at 3,790 yen and Sompo Japan Insurance Inc (8755.T) climbed 7.6 percent to 905 yen.

Mitsui Sumitomo Insurance Co Ltd 8752.T rose 6.1 percent to 1,074, helping make the insurance subindex .IINSU.T the biggest gainer among the subindices with a rise of 6.3 percent.

Among banks, Mizuho Financial Group (8411.T) was up 1.4 percent at 372,000 yen and Sumitomo Mitsui Financial Group (8316.T) was up 1.6 percent at 655,000 yen.

Exporters gained, with Canon up 2.1 percent at 4,290 yen, Sony Corp (6758.T) up 1 percent at 4,000 yen and Toyota Motor Corp (7203.T) up 0.8 percent at 4,870 yen.

But with the dollar's relative weakness against the yen shadowing the long-term earnings outlook for such firms, gains were expected to be limited.

Trade fell off slightly, with some 1 billion shares changing hand on the Tokyo exchange's first section compared with last week's morning average of 1.2 billion.

Advancing shares outnumbered declining ones by 902 to 667. (Reporting by Elaine Lies; Editing by Chris Gallagher)