(Updates prices following BOJ policy decision)

By Kevin Buckland

TOKYO, July 31 (Reuters) - Japan's Nikkei share average

rose on Wednesday, helped by banks after the Bank of Japan

raised interest rates for the second time since 2007.

The Nikkei was up 0.25% at 38,620.85 as of 0421 GMT,

reversing earlier losses. The broader Topix also changed

course to trade 0.37% higher.

The central bank raised its key rate target to 0.25% from

around zero. Expectations for policy tightening had risen

following reports overnight that the BOJ was mulling the move.

Several high-profile Japanese politicians including the

prime minister had also batted for a near-term normalisation of

monetary policy.

The Tokyo Stock Exchange's banking index climbed

2.7% to be the top performer among the 33 industry groupings.

Higher rates would improve lending margins and potentially boost

investment income for banks.

A Topix index of value shares rallied 0.8%, while a

growth share index sagged 0.2%.

"I had thought that a rate hike was unlikely this time,

given ... hard data for both income and consumption doesn't

really show a positive cycle between wages and inflation yet,"

said Norihiro Yamaguchi, senior Japan economist at Oxford

Economics.

"Today's decision revealed the bank's strong appetite for

hiking rates."

Stocks of exporters including automakers were overall

weaker, after the yen strengthened about 0.8% against the dollar

on Tuesday following those reports.

Toyota Motor ( TM ) was among the Nikkei's worst

performers, also pressured by a corrective order from Japan's

transport ministry over violations in vehicle certification

procedures. The stock dropped as much as 4.2% and was last down

2.4%.

It was the first corrective order issued to Toyota ( TM ) and comes

after the discovery of new irregularities, national broadcaster

NHK reported.

Meanwhile, Resona Holdings ( RSNHF ) was the Nikkei's best

performing bank with a 4% jump, while Sumitomo Mitsui Trust

Holdings ( CMTDF ) added 3.3%.

The BOJ's last rate increase, in March, was its first since

2007.

Japanese lenders have attracted larger foreign investment

flows than other sectors, as investors see them as top

beneficiaries of potential monetary tightening.

Banks lured an estimated 472 billion yen ($3.1 billion) of

net stock purchases in the year to July 25, according to J.P.

Morgan quantitative strategy team. That's more than double the

flows into the automobiles and components sector, another top

performer.

($1 = 152.2400 yen)

(Reporting by Kevin Buckland; Editing by Sherry Jacob-Phillips

and Subhranshu Sahu)