Nikkei hits 21-month high, set for best annual gain in 7 years

* Yen weakness boosts exporters

* Nikkei up 23 percent this year

* Yen falls 12.2 percent vs dollar

* Nikkei rises 0.8 pct, Topix gains 0.6 pct

TOKYO, Dec 28 (Reuters) - Japan's Nikkei average rose to a 21-month high on Friday, heading for its best yearly gain since 2005 as exporters were buoyed by a weaker yen on expectations of aggressive monetary stimulus under new Prime Minister Shinzo Abe. Export-focused firms leading the index higher included Toyota Motor Corp, Honda Motor Co, Canon Inc and Nikon Corp, all up between 1.5 and 2.5 percent. Index heavyweight and industrial robot maker Fanuc Corp gained 1.6 percent. The Nikkei advanced 0.8 percent to 10,403.01 by the midday break of its last trading day of the year, touching its highest level since March 11, 2011 and shrugging off a slump in Japan's factory output in November. "We expect the yen to hit 90, and the Nikkei to reach 11,000 as early as late January or early February," said Shun Maruyama, chief Japan equity strategist at BNP Paribas. "The market is pricing in a new inflation target of 2 percent. However, the problem is how to achieve the target. The market is focusing on what the BOJ will announce in its next meeting."

Maruyama said if the Bank of Japan fell short of market expectations At its next meeting, investors would take profit. The BOJ holds its next policy meeting on Jan. 21-22. The benchmark Nikkei has rallied 20.1 percent over the past six and a half weeks, on speculation that Abe will pursue policies to weaken the currency, which has hurt Japanese exporters' competitiveness and their overseas earnings when repatriated. The expectations had prompted foreign investors to turn net buyers of Japanese equities last week for a sixth consecutive week. They bought a net 764.9 billion yen ($8.9 billion) of shares in the week through Dec. 15, the biggest net buying since March 2011, data from the Ministry of Finance showed. The Nikkei is up 23 percent this year, on track for its best yearly gain since 2005, while the Japanese currency has lost 12.2 percent against the greenback this year, and is set to post its biggest annual loss since 2005. The yen hit a more than two-year low of 86.64 to the dollar on Friday. The broader Topix index gained 0.6 percent to 859.26 after the morning session in relatively active trade, with volume at 93 percent of its full daily average for the past 90 trading days. Toshiba Corp climbed 4.1 percent on media reports that it is in talks with three parties to sell a portion of its stake in its nuclear power unit Westinghouse. Nippon Electric Glass Co, however, shed 3.4 percent after the glassmaker cut its earning forecast for the nine-month period through December, citing a price decline in glasses used in flat panel displays.