* One of two big risks has faded after Fed's decision - analyst
* TPP agreement helps mood though short-term effect seen limited
* Commodity stocks lead gains
By Ayai Tomisawa
TOKYO, Oct 6 (Reuters) - Japan's Nikkei share average rose to a 2-1/2-week high on Tuesday as expectations that the U.S. Federal Reserve will wait longer to raise interest buoyed investors' risk appetites.
Also lifting the mood was news that 12 Pacific Rim countries had reached the most ambitious trade pact in a generation.
While markets had expected on Monday that a TPP trade deal would be clinched, the long-term effect on the Japanese economy was seen as positive.
The Nikkei gained 1.6 percent to 18,301.14 points by mid-morning after rising as high as 18,372.72, the highest since Sept. 17.
Investors had been jittery amid fears of sharper Chinese economic slowdown and a possible U.S. interest rate hike this year. But they have returned to riskier assets after a weak U.S. jobs report on Friday prompted speculation the Fed will wait longer to start normalizing rates.
"One of the two big persistent concerns has faded, so investors are taking risks," said Masashi Oda, senior investment officer at Sumitomo Mitsui Trust Bank. "Short-covering by those who had shorted stocks on those worries will likely support the market for a while."
He said that what used to be around 16,500 as the Nikkei's downside is now lifted to 17,500, although the market continues to monitor economic indicators which could gives clues to the U.S. economy's health.
Bank America Merrill Lynch said that from a domestic political standpoint, the TPP is one symbol of Prime Minister Shinzo Abe's growth strategy and an important basis for moving forward on agricultural and other reforms.
"The short-term impact is likely to be limited because some time will be needed for the TPP itself to take effect and tariffs are to be gradually eliminated," economists at the brokerage wrote in a report. "Over the medium term, though, effects on Japan's politics and economy are likely to be gradually felt."
Thirty-two of Topix's 33 subsectors were in positive territory, with commodity stocks leading the gains. Iron & steel stocks soared 3.9 percent, mining stocks surged 2.7 percent and oil shares rose 2.5 percent. Nippon Steel & Sumitomo Metal Corp jumped 4.6 percent, Sumitomo Metal Mining soared 3.7 percent and Inpex Corp gained 2.8 percent.
Exporters gained ground, with Honda Motor Co rising 2.0 percent, Panasonic Corp advancing 2.4 percent and Advantest Corp adding 4.6 percent.
The broader Topix added 1.5 percent to 1,485.42 and the JPX-Nikkei Index 400 advanced 1.5 percent to 13,309.72. (Editing by Kim Coghill)