* Nikkei rises 0.7 pct, Topix up 1.7 pct * Topix's trading volume hits second highest this year * Banks, securities firms in demand By Dominic Lau TOKYO, April 10 (Reuters) - Japan's Nikkei average climbed to its highest closing level in nearly five years on Wednesday, with traders citing new money coming into the market after the central bank started its ultra-loose monetary easing this week. The benchmark has rallied 7.5 percent since the Bank of Japan unveiled last Thursday that it planned to inject $1.4 trillion into the world's third-largest economy to defeat deflation. It conducted its first bond buying operations on Monday. "There is a lot of new money coming into the market, a mixture of hedge funds and long money. I would say probably mainly U.S. long money are the top buyers," a senior trader at a foreign bank in Tokyo said. The Nikkei ended 0.7 percent higher at 13,288.13, its highest closing level since August 2008. Lenders Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group were the two most-traded stocks on the main board by turnover. They rose 5 and 6.7 percent, respectively. Peer Mizuho Financial Group gained 2.8 percent and was the fifth-most traded, while Japan's top brokerage, Nomura Holdings, jumped 6.2 percent. "Certainly financials are the focus of my clients ... There is a little bit of profit-taking in one or two exporter names but nothing significant," the trader said. "Everyone is reluctant to do any shorting, which is helping the upside momentum of the market." Societe Generale said the most traded of April Nikkei index stock options was a call with a strike price of 13,500, 1.6 percent above where the benchmark ended on Wednesday. The next most traded was a put with a strike price of 12,750, followed by another call at 13,750. The broader Topix advanced 1.7 percent to 1,121.04, just below the 38.2 percent retracement of its slide from February 2007 to June 2012, at around 1,125. Volume on the Topix hit its second highest level this year, with 5.28 billion shares changing hands. HSBC UPS JAPAN TO 'NEUTRAL' HSBC raised its weighting on Japan to 'neutral' from 'underweight', although it questioned the effectiveness of the BOJ policy. "In other categories Japan scores so badly it is impossible to justify an overweight recommendation," the brokerage wrote in a report. "Analysts already forecast 49 percent earnings growth in the year ending March 2014, leaving little room for positive growth surprises." "Valuation is not cheap, with forward P/E of 14.2x the highest among developed markets. And the long-term story remains negative, with poor demographics and corporate competitiveness." The benchmark Nikkei has rallied more than 53 percent since mid-November, when Shinzo Abe promised expansionary fiscal and monetary policies, dubbed "Abenomics", to revive the ailing economy during his election campaign. He was elected prime minister the following month. During the same period, the banking sector has surged nearly 79 percent but its valuation remains well below the average for Japanese equities. The banking sector carries a 12-month forward price-to-earnings ratio of 11.07 versus more than 14 for the Topix, data from Thomson Reuters Datastream showed.