By Aiko Hayashi and Chikafumi Hodo
TOKYO, Oct 6 (Reuters) - Japan's Nikkei average rose 1.8percent to a two-month closing high on Wednesday as the Bank ofJapan's credit easing measures the day before continued to inducestrong inflows, especially in the financial and property sectors.
Still, the continuing strength of the yen weighed on sharesof manufactures, such as Toyota Motor which fell 0.8 percent,capping the Nikkei average.
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.
Shares of the financial sector jumped, along with theproperty sector after the BOJ announced a plan to set up a 5trillion yen ($60 billion) fund to buy a wide range of assetsincluding Japanese real estate investment trust (J-REITs).
"The BOJ's series of measures have clearly lifted sentimentand have induced steady short-covering in stocks, but the ongoingstrength of the yen is limiting active follow-through moves,"said Naoki Fujiwara, fund manager at Shinkin Asset Management.
"The yen is the key driver in the stock market now. The fateof the yen will be decided by the Federal Reserve's monetarypolicy," Fujiwara said.
The benchmark Nikkei gained 172.67 points to 9,691.43 -- itshighest close since Aug. 3, while the broader Topix rose 1.4percent to 844.50.
The yen stayed strong, holding near a 15-year high againstthe dollar on heightened expectations of quantitative easing fromthe U.S. central bank following the BOJ's rate cut.
Comments by Chicago Fed President Charles Evans that theFederal Reserve should do much more to spur the economy alsoincreased speculation over a possible resumption of the bank'squantitative easing as soon as its next policy-making meetingscheduled on Nov. 2 and 3.
"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," said MitsushigeAkino, chief fund manager at Ichiyoshi Investment Management Co.
"Rather, the yen is staying on the strong side due toexpectations that the U.S. Federal Reserve might announce alarger-scale easing."
Trade was active on the Tokyo Stock Exchange's first section,with 2.88 billion shares changing hands, its highest volume infive months. Advancing stocks outnumbered declining ones by morethan 2 to 1.
REAL ESTATE, FINANCIAL STOCKS SHINE
The BOJ's fund is designed to cover Japanese governmentbonds, treasury bills, commercial paper, asset-backed commercialpaper, corporate bonds, exchange-traded funds (ETF) and 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."
Active buying buoyed shares of property developers such asMitsubishi Estate, which rose 4.2 percent to 1,476 yen.
The real estate sector subindex was up 4.2 percent.
Shares of financial companies also climbed, with NomuraHoldings jumping 6.9 percent to 435 yen and Mizuho FinancialGroup climbing 8.6 percent to 126 yen.
"Sentiment towards stocks has improved but no major freshbuying has been detected. Banks have jumped in response to crediteasing, while I feel gains in real estate shares have been a bitoverdone," Shinkin Asset's Fujiwara said.
Kaoru Arai, general manager at Rakuten Securities, said theBOJ's purchases of ETFs were likely to be limited to majorJapanese stock indexes such as the Nikkei 225 and Topix, with noinvestments expected in commodities or foreign ETFs.
"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.
There are 93 ETFs listed on the Tokyo Stock Exchange and 14listed on the Osaka Securities Exchange. ($1=83.24 Yen) (Editing by Joseph Radford)