* Nikkei up 0.7 percent, Topix up 0.6 percent * Foreign hedge funds are buyers - analyst * Investors are short on yen, long on Nikkei - analyst By Ayai Tomisawa TOKYO, Nov 30 Japan's Nikkei share average rose on Friday as a weak yen offset uncertainty over U.S. budget talks, boosting risk appetite and encouraging investors to chase exporters on hopes of stronger-than-expected earnings. The Nikkei advanced 0.7 percent to 9,464.43, trading comfortably above its 5-day moving average at 9,396.75 after moving back and forth between positive and negative territories in early trade. Analysts said that sentiment remains positive for earnings for bellwether exporters as the dollar holds above 82 yen, but volume may be subdued due to the fast-paced rise in the market and uncertainty surrounding U.S. budget talks. A day after expressing optimism over a U.S. "fiscal cliff" deal, senior Republican John Boehner said there had been no "substantive" progress made in the last two weeks, denting hopes for a deal to prevent the U.S. economy from slipping into a possible recession next year. "The market is subject to mood swings by investors who pay close attention to small developments in U.S. budget talks, but as long as the yen does not rise far from the current levels, we may see a slow but steady rise in the market," said Takuya Takahashi, an analyst at Daiwa Securities. The market was also closely watching comments by Shinzo Abe, leader of the main opposition party Liberal Democratic Party (LDP), he said. The yen has been under pressure on expectations the LDP will win a Dec. 16 election and increase pressure on the central bank to adopt a bolder monetary policy. Calls by Abe for the Bank of Japan to set an inflation target of 2 percent and embark on "unlimited easing" have weakened the yen sharply over the past two weeks and buoyed exporters. Exporters rose, with Canon Inc adding 1.1 percent and Nissan Motor Co gaining 0.5 percent. DOMESTIC INVESTORS TURN SELLERS Market observers said foreign investors remain positive on bellwether exporters while the dollar holds above 82 yen, but domestic investors are starting to take profits as many are skeptical the central bank will give in easily to Abe's demands. Domestic investors could turn into sellers when the Nikkei nears the 9,500-mark, they said. The benchmark Nikkei has rallied 9.2 percent over the past two weeks, taking the month-to-date gain to 5.9 percent, on track for its best monthly performance since June. "Their positions are like this ... short on the yen and long on the Nikkei. Buying (in the equities market) is mainly by foreign hedge funds such as commodity trading advisors who are chasing the Nikkei 225 futures higher," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Securities. "Domestic players are becoming sellers because they take a cold look at their political climate." Notable gainers included Hitachi Ltd and Mitsubishi Heavy Industries Ltd, which rose 3.7 percent and 2.2 percent respectively after the two companies said they would combine their thermal power businesses to better compete against bigger overseas rivals General Electric Co and Siemens AG . The broader Topix gained 0.6 percent to 784.44.
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