(Updates with closing prices)

TOKYO, Dec 12 (Reuters) - Japan's Nikkei share average

finished at a two-month closing high on Thursday, tracking Wall

Street's strength, after an in-line U.S. inflation report

boosted expectations of a Federal Reserve interest rate cut next

week.

The Nikkei climbed 1.21% in fourth straight session

of gains to 39,849.14, its highest close since Oct. 15. The

index crossed 40,000 for the first time since that day.

The broader Topix rose 0.86% to 2,773.03.

"The Nikkei was not able to keep the 40,000 level because

investors sold stocks to book profits," said Jun Morita, general

manager of the research department at Chibagin Asset Management.

"But the environment is positive for local equities because

the yen seems to remain weak against the dollar even as the Fed

is to cut rates and the Bank of Japan is to raise rates."

Wall Street's benchmark S&P 500 index rose on Wednesday and

a rally in tech stocks lifted the Nasdaq above the 20,000-point

milestone for the first time following the inflation report.

The BOJ is leaning toward keeping interest rates steady at

its meeting next week as policymakers prefer to spend more time

scrutinising overseas risks and clues on next year's wage

outlook.

"Whether the BOJ raises rates this month or next month, the

market is unlikely to make a drastic move like in August," said

Yugo Tsuboi, chief strategist at Daiwa Securities.

Swap rates indicated a 25.3% chance for a 25-bps rate

increase next week and a 69% chance of that move in January.

Chip-testing equipment maker Advantest ( ADTTF ) jumped 5% to

become the biggest boost for the Nikkei. Uniqlo owner Fast

Retailing ( FRCOF ) rose 0.87%.

Silicon wafer maker Shin-Etsu Chemical ( SHECF ) fell 0.77%

to weigh on the Nikkei the most.

Of more than 1,600 stocks trading on the Tokyo Stock

Exchange's prime market, 64% rose and 32% fell, with 3% trading

flat.

($1 = 152.2200 yen)