* Relief on Cyprus erases much of Friday drop * Topix adds 0.8 pct, volume relatively thin * Exporters have ability to rise further - traders By Ayai Tomisawa TOKYO, March 25 (Reuters) - Japan's Nikkei share average rose 1.7 percent on Monday, recovering most of its decline late last week, as Cyprus and the European Union agreed to a plan to deal with the island's financial crisis. The Nikkei rose 207.93 points to 12,546.46. Last Thursday, the index hit a 4 1/2-year high of 12,650.26, but on Friday it dropped 2.4 percent. An EU spokesman said Cyprus and international lenders reached a deal for a 10 billion euro ($13 billion) bailout that would shut down its second-largest bank and inflict heavy losses on uninsured depositors. The agreement came hours before a deadline to avert a collapse of the island's banking system. "Investors know that European debt issues are not something the market expects to be resolved soon. But they were relieved that the rescue plan on Cyprus erased an imminent fear," said Hajime Nakajima, deputy general manager at Iwai Cosmo Securities. Exporters with high exposure to Europe outperformed, with Sony Corp gaining 3.1 percent and being the most traded stock by turnover, while Nikon Corp rose 1.8 percent and Ricoh Co added 2.2 percent. Other exporters were also in demand, with Toyota Motor Corp up 0.8 percent and TDK Corp climbing 1.9 percent. Consumer financing companies and banks also were strong. Aiful Corp and Orient Corp jumped 12 percent and 8.9 percent, respectively, and Mitsubishi UFJ Financial Group advanced 1.6 percent. The broader Topix gained 0.8 percent on Monday to 1,047.29 in relatively thin volume, with 2.70 billion shares changing hands. Last week's average daily volume was 3.06 billion shares. INVESTORS WILL LIKELY REVISIT EXPORTERS Exporters have led the Japanese markets' gains since mid-November, when the yen started weakening on Shinzo Abe's attempt to pull the country out of persistent deflation and bolster growth through bold monetary easing. However, since January, exporters have underperformed domestic-sensitive stocks such as banks as investors started to realize that exporters were becoming expensive, traders said. The auto sector has added 22.5 percent this year, the banking sector 28.5 percent and the real estate sector 30 percent. "In the past few months, there were challenges for exporters to rise further due to concerns about the pace of a recovery in the global economy, so investors' interests have shifted to domestic-demand sensitive stocks," said Masayuki Kubota, a senior fund manager at Daiwa SB Investments. "But when exporters' earnings estimates for the next fiscal year become clearer (in May), investors are likely to buy them again." The Nikkei's gain of about 45 percent since mid-November has lifted the valuations of Japanese equities. According to Thomson Reuters Datastream, stocks now have an average 12-month forward price-to-earnings ratio of 14.1, a level not seen since August 2010. But they are still below their 10-year average, calculated by Datastream at 16.3 times. "Fundamentals still look good for Japanese equities. The improving economy will help company earnings. We are looking for further upside from here," said Hidehiro Tomioka, head of equity investment at Manulife Asset Management in Tokyo. Tomioka said he favoured financials, which benefit from Abe's push to reflate the economy, and exporters, which will get lifted by a softer yen. "I prefer the autos rather than electronics because earnings growth is more stable and stronger for the auto companies. Tech companies are not as strong, especially if you look at the competition," he said. Boosted by yen weakness and improving sentiment, more than half of Japanese companies expect rising profit in the business year starting April 1, a Reuters poll showed on Friday, but investors looking to gain from the fattened coffers may be dismayed as firms keep the cash in-house. Data from Datastream showed Japanese companies' outlook on earnings improved further this month. Their one-month earnings momentum - analysts' earnings upgrades minus downgrades as a total of estimates - rose to 8.7 percent in March from 8 percent last month. It was minus 10.9 percent in November.