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* Nikkei heads for biggest weekly drop since Oct 2008

* When USD falls 1 yen, it pushes down Nikkei by 400 yen - Nomura

* Even if BOJ intervenes, effect will be like short-term 'painkiller' - analyst

By Ayai Tomisawa

TOKYO, Feb 12 (Reuters) - Japan's Nikkei share average fell more than 5 percent to a fresh 16-month low on Friday, and was set for its biggest weekly drop since 2008 as investors rushed to dump risky assets after the dollar dived to a 15-month low against the yen.

The Nikkei fell as much as 5.4 percent to 14,865.77 in morning trade, a level unseen since October, 2014.

For the week, the Nikkei has fallen 12 percent, heading for the biggest weekly drop since October, 2008.

Japanese markets were closed for a public holiday on Thursday, when the dollar fell as low as 110.985 yen, its lowest level since October 2014 as fears of a global economic slowdown and concerns about stress in the banking system increased demand for safe havens. It last stood at 112.24 yen.

Traders said that investors feared Japanese exporters hopes of earnings growth will suffer if the yen strengthens further.

Automakers were hammered, with Toyota Motor Corp falling 6.5 percent, Honda Motor Co dropping 4.8 percent.

According to analysts at Nomura Securities, when the dollar falls by 1 yen, it cuts Japan Inc's pretax earnings by 0.4-0.5 percent and pushes down the Nikkei share average by 400 yen.

Masaru Hamasaki, head of market & investment information department at Amundi Japan, said the Nikkei could stay below the 15,000-line for the time being, with more potential seen on the downside.

Japanese stocks' steep drop followed the Bank Of Japan's decision to adopt negative interest rates late last month, but the yen has gained as investors dumped riskier assets and look for safe havens amid the market turmoil.

Federal Reserve Chair Janet Yellen did little to help the dollar in her second day of testimony before U.S. lawmakers. While she said she still expects the Fed to gradually hike interest rates this year, she reiterated that policymakers were not on a "pre-set" path to return policy to "normal" given a worsening meltdown in global stock markets.

The dollar's overnight jump led to speculation that Japanese authorities were checking currency rates, a step that often precedes intervention. A government official declined to comment on intervention on Friday.

"As long as there is speculation about intervention, speculators may test whether the BOJ may actually act, so we are bracing for another sell-off in stocks," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "If the BOJ acts, it may serve as a short-term 'painkiller' but the effect will likely be short-lived."