* Nikkei pares gains in moderate trade, exporters strong
* Watching new government, especially currency policy
* Brokerage reports boost Canon, Olympus, steel
By Elaine Lies
TOKYO, Sept 16 (Reuters) - Japan's Nikkei average rose 0.5 percent as Canon Inc and other exporters powered higher, bolstered by optimism about the U.S. economy after strong retail sales data.
Though the benchmark Nikkei climbed as much as 1.7 percent at one point, it ultimately pared gains, which some in the market attributed to nerves over Japan's incoming government and worries that financial market reforms may take a back seat.
Yukio Hatoyama was voted in as prime minister and was set to formally announce his new government later in the day after a resounding Aug. 30 election win.
"Stocks often have a rather knee-jerk reaction to things that new government ministers say, and we could really start seeing that tomorrow," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
"There's concern that the new government may unwind a lot of the deregulatory moves put in place over the last few years, and since that deregulation encouraged foreign investors to buy, there's worry they might now start selling Japan."
After the bell, incoming Finance Minister Hirohisa Fujii said that a strong yen has merits for Japan's economy and that current forex moves were not rapid. Following his remarks, the dollar hit the day's low of 90.48 yen on trading platform EBS, nearing a seven-month low of 90.18 yen hit earlier this week.
The benchmark Nikkei rose 53.15 points to 10,270.77. The broader Topix lost 0.1 percent to 931.43.
"There's a tug-of-war going on between the situation shown by good global economic indicators and the situation in Japan, where a strong yen and relatively high valuations are keeping the Nikkei from rising -- and this tug-of-war will continue," said Hiroaki Osakabe, fund manager at Chibagin Asset Management.
"If the yen weakened I think we'd see the Nikkei try for 10,500 again but if the current strong yen trend continues, especially over the upcoming long weekend, this could really increase pessimism in the market."
U.S. stocks rose on Tuesday to 2009 highs as improvement in retail sales in August reassured investors about a rebound in U.S. economic demand. A rise in the government's Producer Price Index signalled increased consumption of raw materials.
Investors were also encouraged by Federal Reserve Chairman Ben Bernanke, who spoke on the one-year anniversary of the collapse of Lehman Brothers and said the recession "is very likely over."
BANKS, EXPORTERS, STEEL
Selling picked up late in the afternoon session, with banks in particular losing ground -- a situation that some said was due to Shizuka Kamei being picked as financial services minister.
Kamei told reporters on Tuesday that he would like to introduce a moratorium on the research and information division at Mitsubishi UFJ Securities.
Mitsubishi UFJ Financial Group, Japan's biggest lender, lost 1.7 percent to 526 yen, while No. 3 bank Sumitomo Mitsui Financial Group fell 1.9 percent to 3,560 yen. Mizuho Financial Group lost 1.5 percent to 195 yen.
Exporters climbed on short-covering on the apparent halt in the yen's rise against the dollar during trading hours.
Canon jumped 4.2 percent to 3,700 yen after Nomura Securities raised its rating on the company to "buy" from "neutral" and hiked its target price to 4,218 yen from 3,462 yen.
Nomura cited Canon's Monday announcement that it will start providing its latest multi-functional printers to Hewlett-Packard later this year.
Tokyo Electron Ltd gained 3.4 percent to 5,470 yen and industrial robot maker Fanuc Ltd added 1.3 percent to 7,690 yen.
Olympus Corp advanced 2.9 percent to 2,490 yen after Credit Suisse reinstated coverage of the camera and medical equipment firm with an "outperform" rating and a target price of 3,100 yen.
Nippon Steel and JFE Holdings climbed after J.P. Morgan started coverage of both firms at "overweight", noting that the steel market has bottomed and is now rebounding, while Kobe Steel rose after coverage was initiated at "neutral".
Nippon Steel rose 1.2 percent to 339 yen, JFE Holdings gained 0.9 percent to 3,230 yen and Kobe Steel added 0.6 percent to 162 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 by 2 to 1. (Reporting by Elaine Lies; Editing by Chris Gallagher)