By Tomo Uetake
TOKYO (Reuters) - Japan's Nikkei stock average edged higher on Friday, led by demand for real estate stocks as investors bet on the new Bank of Japan chief pursuing aggressive monetary easing to pull the world's third-largest economy out of deflation.
The Nikkei closed up 0.4 percent at 11,606.38, led by gains in domestic demand-related plays, after dropping as much as 0.8 percent in the morning. For the week, the benchmark advanced 1.9 percent, the third straight weekly gain.
On Thursday, it rose 2.7 percent, marking the biggest one day percentage rise in three weeks, partly due to end-of-month window-dressing, traders said.
"The Nikkei extended gains today despite lingering concerns over the political situation in Italy and the U.S. government's spending cuts," said Yuya Tsuchiya, a strategist at Toyo Securities.
"Expectations for aggressive easing by the Bank of Japan under (Haruhiko) Kuroda have remained high."
Prime Minister Shinzo Abe's ambition to use the full force of monetary policy to end deflation and spur growth has sharply weakened the yen and sent Tokyo stocks soaring since mid-November, with the Nikkei hitting a 4-1/2 year high on Monday.
Abe nominated Asian Development Bank President Kuroda, an advocate of aggressive policy action, to head the BOJ, bolstering market confidence in the reflation strategy.
"Investors are hoping that Abe's government will tackle asset deflation, so stocks related to the value of land such as real estate, railroad and warehouse shares have been popular recently," said Hajime Nakajima, deputy general manager at Iwai Cosmo Securities.
The real estate subindex jumped 5.1 percent and was the best sectoral performer, with Mitsubishi Estate <8802.T> climbing 6.1 percent and Mitsui Fudosan <8801.T> rising 3.2 percent.
Nomura Real Estate Holdings <3231.T> surged 7.9 percent after Nomura Holdings Inc <8604.T> said it would cut its stake in the Nomura Real Estate in a deal that will raise about $577 million as Japan's largest brokerage prepares for tougher capital regulations.
CHINA PLAYS DROP ON SOFT PMI
Selling in exporters, which have been the biggest gainers since the yen began declining sharply, capped the Nikkei's upside. Nikon Corp <7731.T> fell 0.8 percent and Toyota Motor Corp <7203.T> dropped 0.3 percent.
Although China's weak manufacturing data had a limited impact on the overall Japanese market, exporters with high exposure to the Chinese market were hit. Hitachi Construction Machinery Co Ltd <6305.T> fell 2.1 percent while Komatsu Ltd <6301.T> dropped 0.6 percent.
Data showed Chinese factory activity grew at its slowest pace in four months in February as domestic demand softened.
The broader Topix index, which gives less weight to tech stocks and exporters, outperformed, up 0.9 percent to 984.33, with 2.91 billion shares changing hands, compared with last week's average daily volume of 2.93 billion shares.
After advancing more than 10 percent this year, the Nikkei suffered a correction early this week as the yen's downturn stalled amid uncertainty over the Italian election, spurring worries about a hung parliament and the possibility it could reignite debt problems in Europe.
But analysts said the fallout was likely temporary.
Kenichi Hirano, a strategist at Tachibana Securities, said the Nikkei's long-term sentiment is supported by ongoing hopes for monetary easing.
"The Nikkei will likely add gains towards April as investors expect the central bank will announce easing measures at its policy meeting then," he said.
The Nikkei call option trades were much more active at 12,000, compared to other levels, and that suggests the market participants were seeing more upside for the benchmark in the near term, Toyo's Tsuchiya said.
(Additional reporting by Ayai Tomisawa; Editing by Shri Navaratnam)
