Japan's Nikkei rebounds as bank shares rally after BOJ decision

By Kevin Buckland

TOKYO, Oct 31 (Reuters) - Japan's Nikkei share average rebounded after the Bank of Japan (BOJ) added more flexibility to its yield curve control, but kept the policy in place.

The stock benchmark was up 0.42% at 30,825.95 as of 0441 GMT, after entering the midday recess down 0.15%. The BOJ announcement came just before markets reopened for afternoon trading.

The broader Topix index added 0.64%, extending small gains from the morning.

Financial stocks were the biggest winners, with the Tokyo Stock Exchange's (TSE) insurance and banking indexes rallying more than 2% each to lead gains among the 33 industry sectors. Higher long-term yields and a steeper yield curve improve the outlook for returns from lending and investing.

The banking index had been the best performer in the morning session as well, following an overnight report in the Nikkei newspaper that the central bank was considering raising the ceiling for long-term Japanese government bond yields from 1%.

However, the index pared those gains aggressively in a short-lived knee-jerk reaction after the BOJ confused traders by keeping the 1% level as a reference point, while adding it would not be viewed as a hard cap.

"The BOJ is taking the 'softly, softly' approach here," said Kyle Rodda, a senior markets analyst at Capital.com in Melbourne.

"The incrementalism was perhaps a surprise to markets given the speculation of an actual tweak today," Rodda added. "The decision has given the Nikkei a shot in the arm."

Tech stocks remained a drag on the Nikkei - with chip-related shares tracking a decline in U.S. peers overnight and Panasonic sliding on disappointing earnings - although losses were overall lighter than in the morning.

Chip-testing equipment manufacturer Advantest remained the Nikkei's biggest drag, shaving off 37 points with a 3.5% slide. Chip-making equipment giant Tokyo Electron was next, removing 10-1/2 points with a 0.53% drop.

The U.S. Philadelphia SE semiconductor index lost 1.3% on Monday, even as all three of Wall Street's main indexes gained.

Panasonic was the biggest percentage decliner on the Nikkei by far, tumbling 8.7% after cutting the profit outlook at its EV battery unit.

Of the Nikkei's 225 components, 155 rose versus 68 that fell, with two flat. (Reporting by Kevin Buckland; Editing by Subhranshu Sahu and Mrigank Dhaniwala)