TOKYO - Japan's Nikkei average climbed nearly 4 percent on Thursday to hit its highest close in five weeks as exporters such as Canon Inc (7751.T) jumped on a weaker yen, while metal shares climbed after gold hit a new record.

Mitsubishi Motors Corp (7211.T) soared 13.5 percent after the Nikkei business daily reported that PSA Peugeot Citroen (PEUP.PA) is in talks to spend up to 300 billion yen ($3.4 billion) to acquire a 30-50 percent stake.

Mitsubishi Motors and Peugeot confirmed they were discussing an expansion of their existing partnership that could end in a capital tie-up, underscoring the intensifying pressure to consolidate in the fiercely competitive auto industry.

Stocks of Mitsubishi Motors shareholders, such as trading house Mitsubishi Corp (8058.T), also climbed.

Market players said the overall market likely received a boost from buying by foreign investors partly because they took heart from recent moves by the government and the Bank of Japan on the economy.

Foreign investors are likely putting their money into the Japanese market as the least risky place after Dubai's debt problems revived worries about risk-taking and also after the BOJ unveiled financial measures, said Hajime Nakajima, deputy general manager at Cosmo Securities.

But they are not really buying due to Japan's bright economic prospects ... The market is also in a position to attract foreign money this month after a decline in the weighting of Japanese stocks in global allocations of their portfolios.

But many noted gains still seem to be due to short-covering and that it was still far too early to say if this was the start of a trend.

Dubai threw global markets into a tailspin last week on news that two of its leading companies would ask creditors to agree to a standstill on billions of dollars of debt as a first step to restructuring, though worries have receded.

In active trade, the benchmark Nikkei .N225 jumped 3.8 percent to 9,977.67, its highest finish since October 30 and well above its 25-day moving average around 9,700.

The broader Topix gained 3.4 percent to 888.04.

The BOJ said on Tuesday it would offer around 10 trillion yen ($114 billion) in three-month funds at 0.1 percent and keep its key interest rate steady at 0.1 percent.

The central bank had surprised investors by calling an emergency policy meeting in the face of government pressure to do more to beat deflation.

The yen extended its losses against the dollar on growing investor speculation that Japan may take more quantitative easing steps to get the economy out of deflation and on prospects for potential currency intervention.

The dollar gained 0.6 percent to 87.90 yen. Investors fret about a stronger yen since it eats into exporter profits when repatriated.

The Nikkei was oversold last week and so it was primed for a rebound, and there are also hints that perhaps foreign buying may be starting to pick up as well, said Takashi Ushio, head of the investment strategy division at Marusan Securities.
Finance Ministry data showed foreign investors bought a net 61.5 billion yen ($703 million) of Japanese stocks last week, and orders placed through foreign securities houses in Tokyo showed foreign brokers were set to be net buyers on Thursday.

MITSUBISHI MOTORS SOARS

Shares of Mitsubishi Motors Corp (7211.T) soared to 135 yen after news about the talks with Peugeot. The stock jumped nearly 23 percent at one stage.

Car battery maker GS Yuasa Corp (6674.T) shot up 7.6 percent to 684 yen on hopes for more demand, although Mitsubishi Motors' existing tie-up with Peugeot in electric vehicles has already secured GS Yuasa growing sales with the French auto group.

Mitsubishi Heavy Industries (7011.T) climbed 4.7 percent to 312 yen, Mitsubishi UFJ Financial Group (8306.T) gained 2.3 percent to 497 yen and trading house Mitsubishi Corp (8058.T) rose 3.7 percent to 2,125 yen.

Exporters surged, with Honda Motor Corp (7267.T) up 4.2 percent at 2,985 yen and Toyota Motor Corp (7203.T) advancing 5.6 percent to 3,760 yen.

The story about a realignment in the auto industry also accelerated buying in auto shares, said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

Canon gained 5.4 percent to 3,530 yen and Kyocera Corp (6971.T) jumped 4.5 percent to 7,400 yen.

Sumitomo Metal Mining (5713.T) and other metals shares gained as gold rose to a record high and after copper climbed as well.

Sumitomo Metal Mining, a non-ferrous metal smelter, added 3.3 percent to 1,505 yen, and fellow smelter Dowa Holdings (5714.T) gained 3.7 percent to 508 yen.

Among other notable stocks, Japan Tobacco Inc (2914.T) surged 9.7 percent to 282,200 yen after the Mainichi newspaper reported that the government's planned tobacco tax hike is likely to be a lot smaller than some had feared.

Some 2.5 billion shares changed hands on the Tokyo exchange's first section, above last week's daily average of 2 billion.

Advancing stocks outnumbered declining ones by more than 14 to 1.

(Additional reporting by Elaine Lies; Editing by Joseph Radford)

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