Nikkei gains on optimism over banks after weak start

* Banks benefit from report of bumper earnings

* iPhone fills out KDDI forecast

* HSBC cuts Japan rating, but BNP sees 13,000 for index

TOKYO, Jan 29 (Reuters) - Japan's Nikkei share average rose on Tuesday morning as investors welcomed news that major banks will likely see significantly larger profits this year, helping offset a firmer yen and profit-taking earlier in the session. Investors have been piling into the Japanese market in the hope that "Abenomics", prime minister Shinzo Abe's brand of economic policy involving aggressive monetary easing and a weaker yen, will boost exporters, financials and real estate. Sumitomo Mitsui Financial Group (SMFG), Mizuho Financial Group and Mitsubishi UFJ Financial Group (MUFG) gained between 3.5 and 4.1 percent after the Nikkei newspaper said the recent stock rally would boost the banks' shareholdings and net profit in the current fiscal year. The banks were three of the top four most-traded stocks by turnover on the main board for much of the morning. "Everyone has been speculating on who will benefit from Abenomics, and banks were one of the candidates. Hearing that they will actually see those benefits is a big positive for the market," said Tetsuro Ii, chief executive of Commons Asset Management. The Nikkei was up 0.6 percent at 10,892.94 by the midday break after starting weak as investors took profits. The benchmark grazed 11,000 on Monday for the first time in 32 months. Investors are now turning their eyes to earnings as the Japanese season begins in earnest this week. A rosier outlook for mobile carrier KDDI Corp, which lifted its full-year forecast by 1 percent to 505 billion yen ($5.57 billion) as contracts for smartphones have increased faster than expected, propped the stock up 3.3 percent.

"I think earnings are going to be pretty weak, but most companies are going to get ignored as most people are looking forward to improvements in the yen," said a hedge fund manager who declined to be named. The yen has slid around 10 percent over the past two months, signalling improved profits for exporters whose overseas revenues will increase once repatriated. It firmed against the dollar on Tuesday to 90.76 versus the greenback. "There are going to be some bombs, and that will be greeted negatively, but there's a decent amount of names people are waiting to buy once the bad news clears out, so I think it will be better for the markets," said a hedge fund manager who declined to be named. Maeda Corp tumbled as much as 13.4 percent to a 10-week low, before paring losses to 11.4 percent down, after the contractor forecast an operating loss of 7 billion yen, down from a previous estimate of 5.2 billion yen profit, citing increased cost of construction materials.

MIXED FEELINGS "The two factors to watch now are whether foreign investors, who drove the recent rally, remain bullish and continue buying, and whether retail investors continue to buy into emerging stocks that are relatively immune to the exchange rate," said Yoshihiro Ito, chief strategist at Okasan Online Securities. Foreign banks have mixed outlooks on Japan. While BNP Paribas has raised its target for the Nikkei to 13,000, or 19.8 percent higher than its current level, HSBC shifted Japan back to "underweight" in its global stocks portfolio after raising it to neutral in December. "We feel the excitement over "Abenomics" is now priced in, and the Bank of Japan has yet again shown it will do nothing dramatic to end deflation, said Garry Evans, global head of equity strategy at HSBC, in a note on Monday. The BOJ announced a 2 percent inflation target at its last policy meeting on Jan. 22 and committed to buying open-ended assets, but only from 2014, which disappointed some investors that were hoping for more immediate action. Societe General, however, pointed to the heat around emerging stocks, which market watchers say retail investors have been piling into, partly because of credit deregulation starting in January that enabled them to use the same collateral for multiple margin trades in the same day. "In Japan, the Nikkei 225 was essentially flat after the much anticipated announcement from the BOJ proved a bit of a damp squib. However the Mothers index of small cap companies continue to fly... yet no one really seems to have noticed," said a Societe General note. The Mothers index, or the "market of the high-growth and emerging stocks", has risen 48 percent so far this month and has packed on 72 percent since a low struck in early June 2012. at 921.86. It has outperforming the Nikkei so far this month, gaining 7.2 percent to the benchmark's 4.8 percent gain. Despite the recent rally, the Nikkei remains well below the 2008 financial crisis while the S&P 500 Index and Germany's benchmark stock index have both already exceeded that level.