* Fewer foreigners trading as Hong Kong markets closed - trader * Retail investors buy Mixi, Kenedix - trader * BOJ tankan shrugged off as market focuses on economic recovery - analysts By Ayai Tomisawa TOKYO, July 1 (Reuters) - Japan's Nikkei share average rose on Tuesday as upbeat China factory reports offset some weak spots in the Bank of Japan tankan survey.

Big Japanese manufacturers' business sentiment worsened in the three months to June but is poised to improve in the following quarter, the central bank survey showed.

The Nikkei was up 1.3 percent at 15,356.27 by late morning, nearing a five-month high of 15,442.67 hit last week.

China's official factory data showed activity at a six-month high in June, while a private survey of small and medium-sized firms showed the first expansion in six months on stronger demand.

Market players said that the market largely shrugged off the BOJ tankan as a temporary dip in sentiment had been expected after a sales tax hike in April, and the economy is seen rebounding in the third quarter.

"What matters to investors is a recovery in the economy, and the economy is recovering as the BOJ has said, so there is more upside in the stock market in the coming months," said Jun Yunoki, a strategist at Nomura Securities.

He expects that the Nikkei will aim for 17,500 by the end of September.

The BOJ survey also indicated that big firms also plan to raise capital expenditure by 7.4 percent in the current fiscal year ending in March 2015, more than initially expected, as premier Shinzo Abe's stimulus policies brighten prospects for the world's third-largest economy.

"Retail investors have been buying up today," said a senior trader at a foreign brokerage, adding that such stocks as Mixi Inc and Kenedix Inc, which are among domestic players' favourite stocks, are in demand.

Mixi gained 4.9 percent and Kenedix soared 4.4 percent.

Risk appetites were lifted as activity in China's factory sector quickened to a six-month high in June.

Exporters were in demand, with Toyota Motor Corp rising 1.3 percent, Sony Corp gaining 1.7 percent and Fanuc Corp advancing 2.1 percent.

The broader Topix rose 0.9 percent to 1,274.07, while the new JPX-Nikkei Index 400 gained 1.0 percent to 11,576.95.

(Editing by Kim Coghill)