* Nikkei up 1.3 pct, extends 1.5 pct gain on Tuesday
* BOJ move welcomed but strong yen limits climb -fund manager
* Property shares up on short-covering on BOJ purchase plan
By Aiko Hayashi
TOKYO, Oct 6 (Reuters) - Japan's Nikkei average rose 1.3 percent on Wednesday as investors continued to welcome the Bank of Japan's surprise interest rate cut the day before, although persistent strength in the yen put a damper on gains.
The BOJ pledged to pump more funds into the struggling economy and to keep rates virtually at zero, sending the benchmark Nikkei 1.5 percent higher on Tuesday.
Real estate shares jumped after the central bank said it would set up a fund to buy a wide range of assets, including real estate investment trusts (REITs). The sector was the top gainer among Japanese stocks on active short-covering.
"While the market welcomes the BOJ's move, we can't really expect much impact on fundamentals," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.
"It's not as if the effects of the easing will emerge right away and boost the economic outlook and Japan can emerge from deflation.
"The most important focus seems to have been aimed at currencies but the yen hasn't weakened against the dollar, and that's keeping a lid on further stock gains. Rather, the yen is staying on the strong side due to expectations that the U.S. Federal Reserve might announce a larger-scale easing."
The benchmark Nikkei rose 126.25 points to 9,645.01, near a two-week intraday high hit earlier in the session, while the broader Topix gained 1.1 percent to 842.12.
The Nikkei's 1.5 percent rise on Tuesday was the biggest daily percentage gain since Sept. 15, the day the BOJ intervened in the currency market for the first time in more than six years.
REAL ESTATE STOCKS SHINE
The next upward target for the Nikkei is seen at 9,704, its recent peak hit on Sept. 21, while support likely stands at its 25-day moving average, now at 9,348, which is considered a proxy for the one-month moving average and is closely watched in Japan.
The Nikkei's slow stochastic, an indicator of short-term trends, is pushing upward after pulling out of oversold territory on Tuesday.
U.S. stocks rallied to nearly a five-month high on Tuesday.
The BOJ's action came as markets increasingly believe the U.S. Federal Reserve will stimulate the world's largest economy in a similar fashion.
In early Asia trade, the dollar traded at 83.19 yen, not far from a 15-year low of 82.87 yen set just before Japan intervened in the currency market on Sept. 15.
Analysts have said the BOJ's moves were not sufficient to halt the downward trend in dollar/yen, with the U.S. currency pressured by falling U.S. bond yields and expectations the Federal Reserve will implement fresh quantitative easing.
The Fed's next policy-making meeting is scheduled on Nov. 2 and 3.
The BOJ decided to set up, as a temporary measure, a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from treasury bills to corporate bonds.
The fund is designed to cover Japanese government bonds, treasury bills, commercial paper (CP), asset-backed commercial paper (ABCP), corporate bonds, exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs).
"Buying of assets such as REITs wasn't really expected and that's sparking short-covering in property shares," Ichiyoshi Investment's Akino said. "But the size of the purchases is rather small and unless it is expanded, the impact on the overall market will likely continue to be limited."
Tokyu REIT jumped 6.4 percent to 479,000 yen, while Mitsui Fudosan shot up 5 percent to 1,577 yen and Mitsubishi Estate climbed 5.2 percent to 1,491 yen.
The real estate sector subindex was up 5.3 percent. ($1=83.24 Yen) (Editing by Edmund Klamann)