Japan's Nikkei books best week since mid-August, but BOJ caps gains

(Updates with closing prices)

By Kevin Buckland

TOKYO, Sept 20 (Reuters) - Japan's Nikkei share average rose on Friday and logged its best week since mid-August, but gains were capped as the yen strengthened after the Bank of Japan set the stage for future interest rate hikes

The tech-heavy Nikkei ended the day up 1.53% at 37,723.91, with chip-sector stocks rallying in line with their U.S. peers. The index advanced 1.57% for the week.

The broader Topix index advanced 0.97%.

The Nikkei rose as much as 2.21% in morning trade, paring gains as the yen strengthened after the BOJ upgraded its assessment of consumption and highlighted the increased sensitivity of inflation to currency fluctuations.

The BOJ held short-term interest rates steady at 0.25%, as was widely expected following hikes in March and July.

In the policy statement, officials judged that "private consumption has been on a moderate increasing trend," a more optimistic assessment than the previous view that consumption was "resilient."

"The trajectory, however gradual, remains upward for the BOJ," said Naomi Fink, chief global strategist at Nikko Asset Management.

"Japan is finally overcoming several decades of stagnant growth, (so) there is some justification in the BOJ remaining behind the curve."

The yen was 0.45% stronger at 141.98 per dollar as of 0620 GMT, shortly ahead of BOJ Governor Kazuo Ueda's scheduled news conference.

A stronger currency reduces the value of overseas revenues at the Japan's many heavyweight exporters.

Investors may be extra cautious ahead of a long weekend, with Japan shut for a national holiday on Monday.

Of the Nikkei's 225 components, 160 rose, 63 fell and two were flat.

Shares of chip-making equipment giant Tokyo Electron (TOELF) soared 5.32%, putting it among the Nikkei's top 5 percentage gainers.

Automakers pared early gains, with Toyota Motor (TM) ending the day 0.9% higher and Honda (HMC) up 0.84%.

Uniqlo-owner Fast Retailing (FRCOF) rose 4.16%, making it the Nikkei's biggest support in points terms due to its heavy weighting. (Reporting by Kevin Buckland; Editing by Rashmi Aich, Sherry Jacob-Phillips and Varun H K)