(Adds comments in paragraphs 6 and 12, updates with closing

prices)

By Junko Fujita and Rocky Swift

TOKYO, July 10 (Reuters) - The Nikkei share gauge rose on

Friday, supported by a rally in AI-related stocks, while the

country's bond market and currency also advanced on a potential

redirection in the investment strategy of Japan's vast pension

funds.

The benchmark Nikkei 225 closed 1.2% higher at

68,557.73, after rising as much as 2.4% earlier in the session.

The broader Topix edged up 0.39% to 4,036.08.

The yield on Japan's 10-year government bond

fell 11.5 basis points (bps) to 2.76%, retreating from a

three-decade high. The yen strengthened 0.5% against the

greenback to 161.550.

Tech shares on Wall Street soared after chipmaker Micron

Technology ( MU ) laid out plans to invest more than $250

billion in the United States through 2035.

"Japanese stocks took cues from the rally of the U.S.

technology stocks overnight," said Shuutarou Yasuda, a market

analyst at Tokai Tokyo Intelligence Laboratory.

The index trimmed early gains as South Korea's benchmark

KOSPI narrowed its strength, said Kazuaki Shimada, chief

strategist at IwaiCosmo Securities.

Chip-related shares led the Nikkei's gains, with Sumco ( SUMCF )

surging 15.40% to a daily limit high of 5,244 yen.

SoftBank Group, a tech investment conglomerate,

climbed 10.65% and chip-testing equipment maker Advantest ( ADTTF )

rose 2.3%.

The gains in bonds and the currency followed comments from

Finance Minister Satsuki Katayama on Thursday that the

government would explore measures to encourage pension funds,

including the Government Pension Investment Fund (GPIF), to

increase investments in domestic financial assets.

The prospect of Japan's largest pension investors directing

more funds into local markets boosted sentiment across bonds and

the yen, both of which have faced sustained pressure in recent

years.

"Katayama's remarks helped reverse the selling trend of the

Japanese government bonds, and the yen," said Masahito Sugawara,

a senior strategist at Daiwa Securities. "Now half of the assets

of Japanese pension funds are invested in foreign assets. The

market bet a possible shift of the asset allocation would be

positive to Japanese assets."

The yields extended the decline later in the session as

foreign investors bought the JGBs to cover their short positions

after the European market opened, said Miki Den, senior Japan

rate strategist at SMBC Nikko Securities.

Shares of Fast Retailing ( FRCOF ) closed 3.59% lower,

marking their steepest one-day drop since May 12.