* Nikkei up 3.8 pct this week, 2nd straight weekly rise * Topix climbs to 4-month closing high, up 3.3 pct this week * Exporters gain as yen hits 7-1/2-month vs dollar By Dominic Lau TOKYO, Nov 22 (Reuters) - Japan's Nikkei average climbed 1.6 percent to a 6-1/2-month closing high on Thursday, boosted by gains in automakers and electronics companies on expectations that a sharply weaker yen will boost their earnings. Exporters such as Toyota Motor Corp, Honda Motor Co , Nissan Motor Co and Canon Inc were among the seven most-traded stocks on the main board by turnover, and gained between 2.3 and 3.5 percent. A 4 percent slide in the yen against the dollar in the last week and a half, driven by expectations that the Bank of Japan would take aggressive monetary policy under a likely new government, has increased the allure of long-suffering exporter shares and pushed Japanese stocks higher. A softer yen, which hit a 7-1/2-month low of 82.59 yen to the dollar on Thursday, inflates exporters' overseas earnings when repatriated and lifts their price competitiveness, particularly against South Korean and Chinese rivals. The Nikkei ended 144.28 points higher at 9,366.80, its highest closing level since May 2 and taking the index near "overbought" territory, with its 14-day relative strength index at 69.5. Seventy or above is deemed overbought. The benchmark rose 3.8 percent this week, its second-straight weekly gain and bringing its advance to 10.8 percent for the year. Japan's financial markets will be closed on Friday for a national holiday. The Nikkei's year-to-date performance is slightly ahead of the U.S. S&P 500's 10.6 percent rise and the pan-European STOXX Europe 600's 10.5 percent gain. "Investors are increasingly relieved that exporters' earnings will be better than expected if the yen's weakness continues," said Hiroichi Nishi, general manager at SMBC Nikko Securities. Japanese company earnings have been weak this quarterly reporting season, with 56 percent of Nikkei companies undershooting market expectations, according to Thomson Reuters StarMine data. That compared with 54 percent in the previous quarter. Market participants said the improved sentiment towards Japanese equities, which have been underweight by many global investors, would likely prompt foreign investors to return to the Japanese market. Investor demand for Nikkei call options, which essentially bet on the index to trade higher, was brisk, exceeding demand for put options. According to Reuters data, Thursday's most-traded Nikkei index option was a call with a strike price of 9,750, a 4.1 percent upside from Thursday's close, and a December maturity . The next most-traded was a December call at 10,000 , followed by another December call at 9,500 and a December put at 9,000. GETTING INTO THE GAME "Foreigners have just started to pour in new, long money. Many of them are still underweight on Japanese stocks, but they fear that if they remain underweight, there is risk of losing because they believe that Japanese stocks will outperform their global peers," said Tetsuro Ii, chief executive officer of Commons Asset Management. "We've been getting questions from foreign investors asking how far the Bank of Japan will likely give in to Abe's demands." Shinzo Abe, the leader of the main opposition party Liberal Democratic Party (LDP), has called for more extreme measures from the central bank, including setting a 2 percent inflation target, to pull the export-reliant economy out of deflation. The latest data from Japan's Ministry of Finance showed foreign investors turned net buyers of Japanese stocks last week after three weeks of net selling. They bought a net 133.3 billion yen ($1.6 billion) of shares in the week through Nov. 17. Jun Yunoki, equity analyst at Nomura Securities, said Japanese retail investors were more likely to be sellers in this rally. "Usually they are slow buyers. If the market starts heating up, they will start buying," he said. "People who have suffered losses in their margins will use this opportunity to sell. I think it will take a little bit more time for retailer investors to massively buy." The upbeat sentiment also pushed Japan's top brokerage Nomura Holdings up 6.2 percent to a near seven-month high and rival Daiwa Securities 4.6 percent higher. The broader Topix climbed 1.2 percent to 776.43 to a four-month closing high in active trade, with 2.03 billion shares changing hands, up from Wednesday's 1.87 billion and last week's average of 1.79 billion. Adding to the positive mood from the weaker yen, data from Thomson Reuters I/B/E/S showed the pace of deterioration in Japanese companies' earnings outlooks has slowed slightly in November. Their one-month earnings momentum -- analysts' earnings upgrades minus downgrades as a total of estimates -- stood at -10.9 percent, versus -12.2 percent in October.
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