By Aiko Hayashi and Chikafumi Hodo

TOKYO, Oct 6 (Reuters) - Japan's Nikkei average rose 1.3percent on Wednesday as investors continued to welcome the Bankof Japan's surprise interest rate cut the day before, althoughpersistent strength in the yen put a damper on gains.

The BOJ pledged to pump more funds into the strugglingeconomy and to keep rates virtually at zero, sending thebenchmark Nikkei 1.5 percent higher on Tuesday.

Real estate shares jumped after the central bank said itwould set up a fund to buy a wide range of assets, including realestate investment trusts (REITs), which have struggled to procurefunds since the global credit crunch. The sector was the topgainer among Japanese stocks on active short-covering.

"While the market welcomes the BOJ's move, we can't reallyexpect much impact on fundamentals," said Mitsushige Akino, chieffund manager at Ichiyoshi Investment Management Co.

"It's not as if the effects of the easing will emerge rightaway and boost the economic outlook and Japan can emerge fromdeflation.

"The most important focus seems to have been aimed atcurrencies but the yen hasn't weakened against the dollar, andthat's keeping a lid on further stock gains. Rather, the yen isstaying on the strong side due to expectations that the U.S.Federal Reserve might announce a larger-scale easing."

By the midday break, the benchmark Nikkei had gained 122.58points to 9,641.34, near a two-week intraday high hit earlier inthe session, while the broader Topix rose 0.8 percent to 839.05.

The Nikkei's 1.5 percent rise on Tuesday was the biggestdaily percentage gain since Sept. 15, the day the BOJ intervenedin the currency market for the first time in more than six years.

The next upward target for the Nikkei is seen at 9,704, itsrecent peak hit on Sept. 21, while support likely stands at its25-day moving average, now at 9,348, which is considered a proxyfor the one-month moving average and is closely watched in Japan.

The Nikkei's slow stochastic, an indicator of short-termtrends, is pushing upward after pulling out of oversold territoryon Tuesday.


U.S. stocks rallied to nearly a five-month high on Tuesday.

The BOJ's action came as markets increasingly believe theU.S. Federal Reserve will stimulate the world's largest economyin a similar fashion.

In Asia trade, the dollar traded at 83.18 yen, not far from a15-year low of 82.87 yen set just before Japan intervened in thecurrency market on Sept. 15.

Analysts have said the BOJ's moves were not sufficient tohalt the downward trend in dollar/yen, with the U.S. currencypressured by falling U.S. bond yields and expectations theFederal Reserve will implement fresh quantitative easing.

The Fed's next policy-making meeting is scheduled on Nov. 2and 3.

The BOJ decided to set up, as a temporary measure, a 5trillion yen ($60 billion) pool of funds to buy assets rangingfrom treasury bills to corporate bonds.

The fund is designed to cover Japanese government bonds,treasury bills, commercial paper (CP), asset-backed commercialpaper (ABCP), corporate bonds, exchange-traded funds (ETFs) andJapanese real estate investment trusts (J-REITs).

Of the 5 trillion yen pool, about 500 billion yen will gointo ETFs and REITs.

"Buying of assets such as REITs wasn't really expected andthat's sparking short-covering in property shares," IchiyoshiInvestment's Akino said. "But the size of the purchases is rathersmall and unless it is expanded, the impact on the overall marketwill likely continue to be limited."

Tokyu REIT jumped 6.1 percent to 477,500 yen, while MitsuiFudosan advanced 3.3 percent to 1,552 yen and Mitsubishi Estateclimbed 3.8 percent to 1,471 yen.

The real estate sector subindex was up 3.8 percent.

Shares of financial companies also rose, with Nomura Holdingsrising 3.7 percent to 422 yen.

Kaoru Arai, general manager at Rakuten Securities, said theBOJ's purchases of exchange-traded funds were likely to belimited to major Japanese stock indexes such as the Nikkei 225and Topix, with no investments expected in commodities or foreignETFs.

"The BOJ's purchases of Japanese ETFs will help to providesupport to Nikkei 225 and Topix prices," he said.

"The volume of ETF purchases by the central bank may not belarge but this will be an important way for the BOJ to get accessto the stock market and support stock prices."

Exchange-traded products issue securities backed by physicalassets such as stocks or commodities, giving investors exposureto the underlying prices.

The Japanese ETF market has been struggling, with a totalvalue of assets at $25.3 billion in August, down from a peak ofaround $34.6 billion in 2006 but up from $6.6 billion in 2001.

There are 93 ETFs listed on the Tokyo Stock Exchange and 14listed on the Osaka Securities Exchange. ($1=83.24 Yen) (Editing by Edmund Klamann)