Nikkei extends Feb rally to end just below 9,600

A man passing an electronic board displaying share prices is reflected in a rearview mirror of a taxi in Tokyo April 16, 2010.

TOKYO (Reuters) - Japan's Nikkei share average rose on Thursday to end just below 9,600, underpinned by a softer yen which boosted risk appetite, as it headed towards its best February performance in two decades.

Buoyed by a run of strong U.S. economic data, the European Central Bank's liquidity injection of nearly half a trillion euros and further easing steps by the Bank of Japan, the Nikkei has gained 9 percent this month and 13.5 percent this year.

Market participants said as the rally had been mainly propelled by foreign investors there was still room for the Nikkei to move higher if others jumped in.

"As long as there are people who continue to be sceptical, there is potential for more fuel for those guys to be squeezed higher or forced to participate in this rally," a trader at a foreign brokerage said.

"It certainly is showing surprising relatively unprecedented resilience in recent memory."

The Nikkei closed 0.4 percent higher at 9,595.57 after breaking resistance to end above 9,500 in the previous session for the first time since early August. If the Nikkei were to finish the month with the current gains, it would be the best February performance since 1991.

Foreign investors were net buyers of Japanese stocks for the eighth straight week through Feb 18, its largest net buying since the first week of July.

Jun Yunoki, equity strategy analyst at Nomura Securities, said individual investors to step into the market

"Investors who shed stocks in autos, traders, shippers, banks and financials are looking to return to market to buy back (these shares)," he said.

Among big movers, Elpida Memory Inc jumped 12.6 percent after regulatory filings the previous day showed five Goldman Sachs companies and six Credit Suisse firms had lifted their collective stakes in the Japanese chipmaker.

Goldman Sachs said the increase was for stock lending to clients. Some of the Credit Suisse units said they had lifted their holding for proprietary trading while others said the increase was for stock lending.

Short-selling of Elpida shares has become more difficult as nearly 88 percent of the stock that is available to be borrowed was already out on loan as of Feb 21, according to securities lending research firm Data Explorers.

Data Explorers numbers show short-selling in Elpida increased to 20.95 percent of outstanding shares, up from 18.08 percent on Feb 1.

MAZDA, KDDI FALL

Mazda Motor Corp sank 6.8 percent to a two-week low after announcing a bigger-than-expected share offering of 162.8 billion yen, which would cause a 69 percent dilution in holdings for existing shareholders.

Shares of the automaker have tumbled more than 15 percent so far this week.

The earnings outlook for the Topix's transport equipment sector .ITEQP.T, home to Toyota Motor Corp (7203.T) and Nissan Motor Co (7201.T), had improved, however.

The sector's earnings momentum -- analysts' upgrades minus downgrades as a percentage of total estimates -- was flat this month, recovering from minus 6.2 percent in January and minus 12.4 percent in December, Thomson Reuters I/B/E/S data showed.

That compared with minus 6.6 percent for the broader Topix, down from minus 4.8 percent in January.

The Topix gained 0.5 percent to 829.35 on Thursday.

Nearly 2.54 billion shares changed hands on the main board, up from 2.44 billion the previous session.

KDDI Corp lost 2.1 percent and Nippon Telegraph and telephone Corp dropped 1.1 percent after Nomrua downgraded both telecom firms to "neutral" from "buy".

The brokerage kept its "buy" rating on Softbank Corp, which gained 0.7 percent.

(Editing by Edwina Gibbs)