* Global shift into riskier assets lends support
* China's interest rate hike taken in stride
* Midday volume lowest this year as foreigners on holidays
By Anotoni Slodkowski
TOKYO, Dec 27 (Reuters) - Japan's Nikkei average rose 0.6 percent on Monday in thin trade as increased appetite for global equities in recent weeks lent support and helped to offset any concerns over China's interest rate hike at the weekend.
With global stocks and commodities hovering near multiyear highs on renewed confidence in global growth, and several analysts expecting the Nikkei to gain about 20 percent in 2011, investors have been piling into lagging Japanese stocks which, after losing 2 percent in the year to date, are seen as relatively cheap.
Investors are entering 2011 in a bullish mood, raising equity holdings to a 10-month high, increasing exposure to high-yield credit and cutting back on government debt, Reuters polls showed last week.
"Market players knew that the rate hike was coming and the overall consensus is that China will continue with money tightening into the next year, so the negative reaction is limited," said Mitsushige Akino, general manager at Ichiyoshi Investment Management.
Other investors said, however, that with major Asian markets such as Hong Kong and Australia closed on Monday for the holidays, more time was needed to see the full market reaction to the rate increase. The mainland's benchmark Shangai Composite Index was up more than 1 percent in early trade.
The People's Bank of China increased the benchmark lending rate by 25 basis points to 5.81 percent and the benchmark deposit rate by 25 basis points to 2.75 percent, sending the Australian dollar and commodity prices lower on Monday.
"Investors are focusing on sectors that are still most undervalued, such as real estate and banks. The Nikkei is predicted to rise significantly in 2011 and without gains in these shares, such gains won't be possible," Akino said.
LOW VOLUME
By the midday break the benchmark Nikkei was up 0.6 percent or 61.07 points at 10,340.26. It had climbed to its highest since May 14 on Wednesday.
The broader Topix index gained 0.3 percent to 904.26.
Midday trading volume dropped to its lowest this year, with around 540 million shares changing hands on the Tokyo Stock Exchange's first section by the midday break, and was set to stay well below last week's daily average around 1.6 billion shares.
"Foreign investors who constitute over 60 percent of the market players in Tokyo are away on holidays, so even slightly bigger market moves are not that significant," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
Investors said that a row in the ruling Democratic Party of Japan may have a negative impact on the otherwise strong mood on the Tokyo market.
The rift is distracting the government from addressing tough policy decisions and complicating prospects for passing laws, including bills needed to implement the budget for the fiscal year from April 1, approved by the cabinet on Friday.
Shares of PC memory maker Elpida Memory jumped 4.0 percent after a newspaper report that it will start talks on equity tie-ups with two Taiwanese chipmakers.
Positive sentiment in the Tokyo market was bolstered by solid long-term technical indicators, with the Nikkei keeping well above immediate technical support at the closely watched 25-day moving average, now at 10,192.47.
The technical mood could strengthen further if the Nikkei breaks through resistance at 10,420.74, where December futures and options contracts settled earlier this month, traders said. (Additional reporting by Chikafumi Hodo; Editing by Edmund Klamann)