* Yen weakness boosts exporters
* Nikkei up 23 pct this year, yen down 12 pct vs dollar
* Nikkei, Topix rise 0.7 pct on last trading day of 2012
* Long-only funds' buying continues -analyst
By Ayai Tomisawa
TOKYO, Dec 28 (Reuters) - Japan's Nikkei average climbed to a 21-month high on Friday, posting its best yearly gain since 2005, as rising expectations of aggressive monetary stimulus under new Prime Minister Shinzo Abe weakened the yen and bolstered exporters' shares.
Blue-chip exporters Toyota Motor Corp, Honda Motor Co, Canon Inc and Nikon Corp posted gains of 1.1 to 2.3 percent. Index heavyweight and industrial robot maker Fanuc Corp gained 1.2 percent.
The Nikkei advanced 0.7 percent to 10,395.18 on the last trading day of the year, after touching its highest level since March 10, 2011, in intraday trade.
The yen hit a more than two-year low of 86.64 to the dollar on Friday. A weaker yen makes Japanese exports cheaper and increases the earnings of exporters when repatriated from overseas.
Abe, whose Liberal Democratic Party won a landslide victory in a parliamentary election on Dec. 16, has called on the Bank of Japan to set a 2 percent inflation target, double the bank's current goal, and to ease policy "without limits" to beat deflation.
"We expect the yen to hit 90, and the Nikkei to reach 11,000 as early as late January or early February," said Shun Maruyama, chief Japan equity strategist at BNP Paribas.
"The market is pricing in a new inflation target of 2 percent. However, the problem is how to achieve the target. The market is focusing on what the BOJ will announce in its next meeting."
Maruyama said if the BOJ fell short of market expectations at its next meeting, investors would take profits. The BOJ holds its next policy meeting on Jan. 21-22.
The benchmark Nikkei has rallied 20 percent over the past six and a half weeks, on expectations that Abe will pursue policies to weaken the currency and help the export-oriented economy pull out of recession.
Those expectations had prompted foreign investors to be net buyers of Japanese equities last week for a sixth consecutive week. They bought a net 764.9 billion yen ($8.9 billion) of shares in the week through Dec. 15, the biggest net buying since March 2011, data from the Ministry of Finance showed.
The Nikkei is up 23 percent this year, its best yearly gain since 2005, while the Japanese currency has lost 12.2 percent against the greenback this year, and is set to post its biggest annual loss since 2005.
"Such funds as macro hedge funds have already chased the market higher, but some long-only funds are seen still 2 to 3 percent underweight of Japan. They have changed their investment stance on Japan to 'neutral' from 'underweight', so they are still buying and will probably continue buying next year," said Hiromichi Tamura, chief strategist at Nomura Securities.
The broader Topix index gained 0.7 percent to 859.80 in relatively active trade, with 2.89 billion shares changing hands.
Toshiba Corp climbed 5.0 percent on media reports that it is in talks with three parties to sell a portion of its stake in its nuclear power unit Westinghouse.
Nippon Electric Glass Co, however, shed 4.1 percent after the glassmaker cut its earnings forecast for the nine-month period through December, citing a price decline in glass used in flat panel displays.