* Market mood optimistic but profit-taking caps gains
* Market shrugs off BOJ rate decision; China data as expected
* Construction shares gain in the wake of storm, earthquake
* Daiichi Sankyo jumps on new flu drug test; Astellas drops
* Blue-chip exporters pause after leading market rally
By Aiko Hayashi
TOKYO, Aug 11 (Reuters) - Japan's Nikkei average hit its highest close in 10 months on Tuesday, with construction stocks such as Obayashi Corp gaining in the wake of an earthquake and a storm that triggered mudslides.
Analysts said investors shrugged off news from the Bank of Japan and Chinese economic data and instead focused on individual stocks with specific news as the overall market lacked convincing moving factors and a direction.
Nippon Sheet Glass surged over 9 percent after a brokerage initiated its coverage with a "buy" rating, while drugmaker Daiichi Sankyo extended gains after it said a new flu drug candidate has succeeded in late-stage trials in Asia.
But Astellas Pharma dropped after Swiss drugmaker Novartis AG said its Sandoz business has launched the first generic version of Prograf capsules. Exporters including Honda Motor Co took a breather after leading a rally in the broader market.
"The Nikkei's current level of around 10,500-11,000 is based on investor expectations for a 'V-shaped' recovery in earnings in the next business year," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
"But evidence so far is not yet convincing enough for such a recovery for real and investors will need more evidence. Trade could be rangebound until earnings reports for the first half (April-September) run their course."
Akino added market falls are also likely to be limited due to the absence of aggressive sellers as very little negative news has emerged.
During the Tokyo market's midday break, the BOJ announced it was keeping interest rates on hold and maintained its cautious view on the economy.
Meanwhile, China reported below-forecast growth in factory output and investment, underlining why senior officials keep reminding markets that recovery in the world's third-largest economy is not yet on solid ground.
In light trade, the benchmark Nikkei rose 0.6 percent or 61.20 points to 10,585.46, its highest finish since Oct. 3.
The broader Topix added 0.4 percent to 973.51. The Nikkei's next target is likely to be 10,800 -- a 50 percent Fibonacci retracement from its June 2008 high and last October's 26-year low just under 7,000 -- followed by 11,000, roughly the level from which it fell rapidly after Lehman Brothers failed last September.
In the short-term, market participants are awaiting the results of the Federal Reserve's two-day meeting which ends on Wednesday.
CONSTRUCTION FIRMS RESILIENT
Major manufacturers including Suzuki Motor, Yamaha Motor, Panasonic, Sony and Fujitsu Ltd said they had not seen damage to their factories in the area of the quake on Tuesday morning, which was centred southwest of Tokyo.
But construction shares gained on expectations for reconstruction efforts after recent floods and the earthquake, market players said. They added the sector was also playing catch-up as it lagged behind during the market recovery-run led by exporters.
Obayashi Corp jumped 5.2 percent to 445 yen, Shimizu Corp climbed 3.6 percent to 402 yen and Taisei Corp advanced 3.7 percent to 225 yen.
Nippon Sheet Glass surged 9.2 percent to 355 yen after Bank of America Merrill Lynch initiated coverage with a "buy" rating, citing expectations of a significant earnings contribution from price hikes on European construction-use glass.
Daiichi Sankyo climbed 5 percent to 1,908 yen after it and Australian biotech firm Biota said on Monday that a new flu drug has succeeded in late-stage trials in Asia. Daiichi Sankyo holds the Japan rights to manufacture and market the drug.
But Astellas Pharma lost 4.9 percent to 3,690 yen, while exporter shares took a breather. Honda slid 2.8 percent to 3,120 yen and electronics components maker TDK Corp shed 2.5 percent to 5,370 yen.
Some 1.9 billion shares changed hands on the Tokyo exchange's first section, below last week's daily average of 2.1 billion.
Advancing stocks outnumbered declining ones by 2 to 1. (Editing by Joseph Radford)