Nikkei scales 21-month high as weak yen lifts exporters

People look at a stock quotation board outside a brokerage in a business district in Tokyo December 19, 2012.

TOKYO (Reuters) - The Nikkei share average climbed to a 21-month high on Thursday, led by exporters, as the new Japanese prime minister's vow to battle deflation and a strong currency weighed on the yen.

The Nikkei .N225 advanced 0.9 percent to 10,325.62, taking the index deeper into "overbought" territory, with its 14-day relative strength index at 77.8, far above the 70 which is considered overbought, and often indicates an imminent pullback.

"People are back in the office today after the overseas markets ... and putting on some positions based on what we saw after the cabinet appointment and LDP policy decision," a dealer at a foreign brokerage said, referring to the ruling party.

"It's going to be interesting to see what's going to happen in the market in the afternoon session and tomorrow because Tokyo closes pretty much for the entirety of next week. There is a lot of headline risk that could happen ... I would not be surprised to see some profit-taking," the broker said.

Finance Minister Taro Aso said Prime Minister Shinzo Abe has ordered him to compile a stimulus package without sticking to the previous government's cap on new bond issuance, signaling a more aggressive policy to kick-start the ailing economy.

Exporters benefiting from the yen's weakness included Toyota Motor Corp (7203.T), Honda Motor Co (7267.T), Nikon Corp (7731.T) and Panasonic Corp (6752.T), all up between 0.7 and 1.5 percent.

The yen was quoted at 85.65 to the dollar on Thursday after hitting a more than two-year low of 85.735 yen on Wednesday.

A weaker yen helps lift exporters' overseas earnings when repatriated, thereby improving their competitiveness, particularly against South Korean and Chinese rivals.

Insurers .IINSU.T also rose sharply, up 1.7 percent, as the rally in stocks boosted the value of their equity holdings.

The broader Topix .TOPX gained 0.9 percent to 855.57.

The benchmark Nikkei has risen 19.3 percent over the past six weeks, taking the year-to-date gain for the Nikkei to 22.2 percent, outpacing a 12.9 percent rise in the U.S. S&P 500 .INX and a 14.7 percent gain in the pan-European STOXX Europe 600 .STOXX.

Japanese equities carry a 12-month forward price-to-earnings ratio of 12.6, slightly cheaper than the S&P 500's 12.8 but more expensive than STOXX Europe 600's 11.5, data from Thomson Reuters Datastream showed.

(Reporting by Dominic Lau; Editing by Daniel Magnowski)