Japan's Nikkei hits 4-month high led by Sony

(Updates to mid-afternoon)

TOKYO, May 15 (Reuters) - Japan's Nikkei average climbed 1.4 percent to a four-month high on Thursday and the broader Topix index rose 2 percent on a wave of positive sentiment set off by Sony Corp (6758.T: Quote, Profile, Research, Stock Buzz), which rose over 9 percent after announcing a bigger-than-expected outlook.

Nippon Steel Corp (5401.T: Quote, Profile, Research, Stock Buzz) and other steelmakers surged after a report that Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) has agreed with it and other top Japanese steelmakers to pay over 30 percent more for sheet steel, while bank shares -- sold recently -- also powered higher.

"Sony's results are being taken very positively by the market, setting off expectations of more rises down the road, and this is working as a big overall plus psychologically," said Katsuhiko Kodama, a senior strategist at Toyo Securities.

Sony shares went untraded for half an hour after the start of trade due to a flood of buy orders. They first changed hands at their daily limit-high, up more than 10 percent.

By 0426 GMT Sony was up 9.3 percent at 5,310 yen, the biggest contributor to the Nikkei's rise.

The benchmark Nikkei .N225 rose over 200 points to 14,322.46, a four-month high. The broader Topix was up 2 percent at 1,400.17.

Institutional investors appeared to be venturing into the market to snap up bank shares and blue-chips, Kodama said, with buying by hedge funds that has been detected over the past few days continuing.

Exporters, boosted in early trade by a weaker yen, were still going strong in the afternoon despite the dollar's slipping back to around 105 yen <JPY=>.