By Ayai Tomisawa
TOKYO (Reuters) - The Nikkei average climbed 1.6 percent to a fresh 5-1/2-year high on Wednesday, spurred on by the Bank of Japan's optimism about the economic outlook, while Sony Corp surged on reports it may consider a proposal to spin off its entertainment assets.
As widely expected, the Bank of Japan kept policy steady earlier in the day, and maintained its pledge to increase base money, or cash and deposits at the central bank, at an annual pace of 60 trillion to 70 trillion yen.
It upgraded its assessment of the economy, saying it "has started picking up," as Prime Minister Shinzo Abe's programme of aggressive fiscal and monetary stimulus has boosted sentiment and a weaker yen has halted a decline in exports.
The Nikkei added 246.24 points to 15,627.26, the highest closing level since December 2007. It rose as high as 15,706.63 earlier, also the best mark since the same time.
"Investors bought Nikkei futures as well as cash stocks with large market caps," said Naoki Fujiwara, a fund manager at Shinkin Asset Management. "The market has confirmed the central bank's stance to keep its aggressive monetary easing going."
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The market started off on a strong footing after two senior Federal Reserve officials dampened speculation that the U.S. central bank might start tapering its stimulus programme this year.
"Global funds, which are picking up global cyclical shares in the U.S. market, are buying more such shares in the Japanese market," said Hikaru Sato, a senior technical analyst at Daiwa Securities.
Exporters attracted buying, with Panasonic Corp rising 2.0 percent and TDK Corp gaining 2.8 percent.
A senior trader at a foreign bank said that there is still a structural underweight in Japanese equities, and he estimated that global investors would plough about $100 billion into Japanese equities to switch their position to neutral from underweight.
According to the Ministry of Finance, foreign investors have invested a total of 7.57 trillion yen into Japanese stocks since the end of 2012.
The broader Topix gained 0.4 percent to 1,276.03 in active trade, with 6.38 billion shares changing hands, the highest since April 5. It compares with last month's average daily volume of 4.31 billion shares.
SONY IN PLAY
Sony Corp jumped 5.9 percent after the Nikkei newspaper said the company is considering evaluating a proposal from top shareholder Third Point LLC, controlled by Californian billionaire Daniel Loeb, to spin off its movie and music business. It was the third-most traded stock on the main board by turnover.
The stock has surged nearly 139 percent so far this year, outpacing the broader market, although it now carries a 12-month forward price-to-earnings ratio of 35, more than double the 15.9 average for Japanese equities, according to Thomson Reuters Datastream.
The benchmark Nikkei has rallied about 50 percent this year, and it has soared nearly 10 percent since May 9, when the dollar broke above the 100-yen mark.
"Japan is rapidly becoming a big momentum trade and thus liable to volatility; trading a momentum market has to be a case of trying to stay long quality rather than chasing beta," Mark Tinker, manager at AXA Framlington Global Opportunities Fund, wrote in a note.
"The near term risks we see are largely associated with the current behaviour of the Japanese government bond market."
(Additional reporting by Dominic Lau; Editing by Shri Navaratnam)