TOKYO (REUTERS) - Japan's Nikkei share average rose on Tuesday morning as investors scooped up battered stocks such as financials, offsetting weakness in export shares after the yen firmed overnight.

The Nikkei rose 0.6 per cent to 13,337.35 by the midday break after bobbing in and out of negative territory in choppy trade.

It dropped as low as 13,060.94 earlier.

Hopes for further pension fund buying also lent a firmer tone to the market.

Sources told Reuters that Japan's government is set to urge the public pension funds - which control a pool of over US$2 trillion (S$25 billion) - to increase their investment in equities and overseas assets as part of a growth strategy being readied by Prime Minister Shinzo Abe.

"Pension funds tend to play it safe... they invest in equities when stock prices are cheap, but if that trend is changing it would serve as a support to investor sentiment," said Mr Toshihiko Matsuno, senior strategist at SMBC Friend Securities.

"But it's too early to believe that pension funds are aggressively chasing the market higher, so we need more details."

The Nikkei has fallen by 16.3 per cent from a five-and-a-half year peak hit last month, hurt by worries over slowing growth in China and concern that the US Federal Reserve may scale back its stimulus policies earlier than the market had expected.

But Monday's data showing US manufacturing contracted in May for the first time in six months eased worries about the stimulus programme, although a more important jobs report is due later this week.

Securities and banks, which dropped sharply on Monday, outperformed as investors scooped the stocks after their recent slide.

Nomura Holdings gained 1.0 per cent, Daiwa Securities Group jumped by 6.3 per cent and Mitsubishi UFJ Financial Group soared by 4.3 per cent.

But exporters lost ground on the rising yen, with Toyota Motor Corp dropping 1.0 per cent, while Honda Motor Co shed 1.6 per cent and Komatsu Ltd shed 1.8 per cent.

On Monday, the dollar fell below 100 yen, hitting as low as 98.86 yen, its lowest since May 9, as the weak US data raised concerns about the US economy. The dollar last traded at 99.58.

The dollar slightly pared its losses versus the yen after the news of a potential policy shift on investments made by public pension funds.

Market players said investors were focusing on whether the Nikkei will break below the 13,000 mark, a level that existed before the Bank Of Japan announced sweeping monetary easing under new Governor Haruhiko Kuroda.

If it breaks below that level and is headed further south, it means that Japan is heading towards a bear market.

"The market is focused on 13,000. But even now, some sectors, which are beneficiaries of easy monetary policy, are already in a bear market, so we can say that 'premiums added on the back of the Kuroda magic' were already stripped off from risk assets," said Mr Yasuo Sakuma, portfolio manager at Bayview Asset Management.

Such sectors as financials and real estate, which rose on Prime Minister Shinzo Abe's reflationary policy and the central bank's aggressive monetary easing in early April, have dropped sharply on profit-taking over the past few sessions.

The banking sector has lost 21 per cent since touching a four-and-half year high on May 15, while the real estate sector has fallen by 23.7 per cent since hitting a five-and-half year peak on April 12.

JREITs, which hit a five-and-half year high on April 5, has fallen by more than 20 per cent.

The Topix gained 0.3 per cent to 1,099.84.