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TOKYO (Reuters) - Japanese shares climbed to a 5-1/2 year high on Friday as the U.S. dollar broke through the elusive 100-yen mark and extended its gains, with exporters and financials leading the charge on prospects of enhanced corporate earnings.
The benchmark Nikkei share average .N225 rose 2.9 percent to 14,607.54, the highest closing level since early January 2008 and surpassed the settlement price of a swathe of May options set on Friday morning at 14,601.95.
"The fact that the Nikkei finished above the settlement price is quite meaningful," said Hiroyuki Fukunaga, the chief executive of Investrust. "It means the market is buoyant. Now that level could serve as a support line in a downtrend."
"There is strong demand for currency-sensitive exporters today... even stronger than recent days," said a fund manager at a U.S. asset management firm.
"Short-term investors are the main buyers, while long-term investors have yet to catch up with the steep rises recently. When they start buying aggressively, these exporters will likely rise further."
On the week, the Nikkei index was up 6.7 percent, the biggest weekly gain since December 2009.
Financials were also among the gainers, with the Topix securities sector subindex .ISECU.T rising 4.6 percent, and the insurance sector .IINSU.T adding 4 percent.
The broader Topix .TOPX advanced 2.4 percent to 1,210.60 in active trade, with volume hitting the highest in nine sessions as 4.43 billion shares changed hands.
The market was already upbeat after the dollar punched through 100 yen on Thursday, helped by data showing U.S. claims for unemployment benefits fell to the lowest level since January 2008.
During Asian trade, the yen fell to as low as 101.20 per dollar, the lowest level in over four and a half years.
"The 100 yen breakthrough must be a milestone for FX traders but for many stock market participants, it's just a stepping stone. I'm not overly excited," said Yasuo Sakuma, portfolio manager of Bayview Asset Management.
He said the Nikkei could rise to 15,000 by the end of this month, adding large cap stocks on Topix still offered upside potential, unlike smaller caps on the Jasdaq and TSE Mothers.
The yen's break below the key level was also underscored with data showing Japanese investors finally reversed their relentless net selling of foreign bonds.
Japanese investors bought 309.9 billion yen ($3.1 billion) in foreign bonds in the week through May 4 after purchasing 204.4 billion yen in the prior week, according to the Ministry of Finance.
"We've started seeing a new outlook for the Japanese market," said Kyoya Okazawa, head of global equities at BNP Paribas.
Prominent foreign investors who are bullish on Japan include Daniel Loeb, who told a hedge fund conference in the U.S. on Thursday he had reaped profits from betting against the yen, contributing to double-digit returns for his $13 billion Third Point fund this year.
Loeb praised Abenomics and said Japan's economic recovery is now "in the second inning".
With the earnings season in full swing and companies reporting strong results for the year ended March 2013, many of the blue chip companies have surprised investors with overly conservative forecasts for the current fiscal year.
Firms such as Toyota and Sony Corp (6758.T) have based their foreign exchange assumptions at 90 yen to the dollar.
However, traders were optimistic about the outlook for corporate Japan.
"Conservative forecasts did not lead to pessimism in the market. They rather made us think, 'oh, they can generate such profits even at 90 yen, then their actual profits will be way better at the end of the day,'" said Takuya Takahashi, an analyst at Daiwa Securities. ($1 = 99.3050 Japanese yen)
Additional reporting by Ayai Tomisawa; Editing by Sanjeev Miglani