(Updates with closing levels)

By Brigid Riley

TOKYO, May 27 (Reuters) - Japan's Nikkei share average

edged up on Monday to track Wall Street higher, while the

financial sector rallied to give the index an additional boost

as Japan's government bond yields hit fresh decade peaks.

After slumping at the end of last week, the benchmark index

rebounded, following a rise in U.S. stocks overnight on Friday

on news of an improving consumer outlook on inflation.

"Risk mood is upbeat today after softer inflation

expectations from the (University of Michigan) sentiment

survey," said Charu Chanana, global market strategist and head

of FX strategy at Saxo.

The Nikkei closed up 0.66% at 38,900.02, while the

broader Topix rose 0.87% to 2766.36, with trading volume

thin due to U.S. and UK public holidays.

At the same time, questions about tapering of the Bank

of Japan's bond purchases and further policy rate hikes remained

in focus, as BOJ Governor Kazuo Ueda and his deputy Shinichi

Uchida spoke in the Asian morning and government yields

continued to climb.

Shares of financial firms, which tend to benefit in a

higher interest rate environment, rose in the afternoon session

in response.

The insurance sector was up 3.3% to lead

gains among the Tokyo Stock Exchange's 33 industry sub-indexes.

While the Nikkei touched the closely watched 39,000 level

this month, it has struggled to maintain the key range amid

monetary policy uncertainty both abroad and domestically, as

well as conservative revenue outlooks from Japanese companies.

The index rose to an all-time high of 41,087.75 on March 22,

but retreated the following month.

On Monday, chip-related shares largely advanced, following a

strong performance by their U.S. peers on the back of Nvidia ( NVDA )

earnings last week.

Advantest ( ADTTF ), which counts Nvidia ( NVDA ) among its customers,

rose 1.4%, while AI-focused startup investor SoftBank Group ( SFTBF )

gained 1.1%.

Insurance firm Tokio Marine Holdings ( TKOMF ) jumped

3.7%.

Among other index heavyweights, Uniqlo parent firm Fast

Retailing ( FRCOF ) advanced 1.3%, and Toyota Motor ( TM ) was

up 1.7%.