* Nikkei capped by pre-weekend profit-taking
* Kirin gains on brokerage upgrade
* JAL tumbles on report it has been asked to reduce capital
* Market participants await earnings, indicators next week
By Elaine Lies
TOKYO, Oct 23 (Reuters) - Japan's Nikkei stock average edged up 0.2 percent on Friday, with construction machinery shares rising on hopes for China's economy and Kirin Holdings gaining ground on a brokerage upgrade.
But Japan Airlines fell nearly 7 percent after the Nikkei business daily reported some creditors have asked the struggling carrier to reduce its capital.
A source familiar with the matter also said JAL's liabilities would exceed its assets by as much as 800 billion yen ($8.8 billion) if the carrier, Asia's largest by revenues, were liquidated.
The benchmark Nikkei gained 0.2 percent on the week, with investors reluctant to actively take positions ahead of Japanese corporate earnings and a raft of economic indicators both in Japan and the United States next week.
"With all the earnings we have next week, along with indicators, the approaching end of the month and the weekend, investors are leaning towards profit-taking," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.
The Nikkei rose 15.82 points to 10,282.99, while the broader Topix, which is less tech-heavy, fell 0.7 percent to 902.03.
Japanese retail investors grew more pessimistic about domestic stocks in October on concerns about the impact of a stronger yen on manufacturers' earnings, a Reuters survey showed on Friday.
The currency strengthened to less than 88 yen to the dollar earlier this month for the first time since late January, hurting the outlook for Japan's export-led economy as a strong yen eats into the value of earnings made abroad when they are repatriated.
On Friday, the dollar rose 0.4 percent against the yen to 91.66. Many Japanese exporters have set their currency rate assumptions at 90-95 yen for the year to March.
"We're seeing a lot of good earnings forecasts and there's a slight trend towards a weaker yen, so by rights the Nikkei should be a lot higher than it is," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"But domestic institutional investors appear to be selling, which is keeping the Nikkei from gaining much. Once the earnings are actually out to confirm the forecasts, and currencies settle down, we may see the Nikkei move higher."
CHINA, DEFENSIVES
Shares of companies linked to China such as Hitachi Construction continued to find favour, rising on what dealers said was less a response to Thursday's economic data than it was to China's fundamental economic strength.
China's economy surged 8.9 percent in the third quarter, but the outcome was widely expected.
Hitachi Construction, which makes earth moving equipment, rose 3.1 percent to 2,335 yen while bigger rival Komatsu climbed 1.3 percent to 1,852 yen.
A broad range of so-called defensive shares rose as well, with Kirin Holdings jumping 5.5 percent to 1,479 yen after Morgan Stanley lifted its rating to "overweight" from "equal-weight", saying in a client note that investors have undervalued the company's solid earnings.
"There's a tendency right now for investors to flock to any shares with good news, since the rest of the market is kind of lacklustre right now," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
JAL slipped 6.6 percent to 114 yen but gained 13 percent on the week, erasing roughly half the losses it suffered last week.
Banks fell as well, with top lender Mitsubishi UFJ Financial Group down 2.5 percent to 460 yen, No. 3 bank Sumitomo Mitsui Financial Group losing 2.2 percent to 3,150 yen.
Trade was moderate on the Tokyo exchange's first section, with 2 billion shares changing hands, in line with last week's daily average.
Declining stocks outnumbered advancing ones, 957 to 566. (Reporting by Elaine Lies; Editing by Edwina Gibbs)