Japanese shares rose almost 4 percent on Tuesday while government bond futures slipped as reports of progress to contain radiation leaks at a quake-hit nuclear plant prompted investors to buy back risky assets.
As Tokyo markets reopened after a long weekend, the yen edged higher, although it traded below its record high reached on Friday, before the world's major central banks intervened for the first time since 2000, using an estimated $30-35 billion.
Technicians working at the stricken nuclear plant on Japan's Pacific coast have managed to attach power cables to all six reactors and started a pump at one of them to cool overheating nuclear fuel rods.
This encouraged investors to buy back domestic shares, especially after they fell 10 percent last week.
The problem of nuclear leakage appears to be moving in the right direction, which is... helping shares, said Ryosuke Okazaki, chief investment officer at ITC Investment Partners Corp.
But at the moment, there are too many uncertainties. We still need to analyze the impact of the nuclear leakage problem and the outlook for power shortage in the long run.
The Nikkei <.N225> was up 3.9 percent at 9,565.00 points, popping above the key 9,500 level where portfolio managers and traders were expected to sell to cut losses.
The next resistance for the index seems to be the March 14 low of 9,578.
Buyers were attracted to cheap valuations after Japanese shares suffered their worst two-day decline since October 1987 earlier last week.
According to Thomson Reuters StarMine, the Nikkei 225 components were trading right above book, with their price-to-book ratio standing at 1.1. The same ratio for the S&P 500 index <.SPX> stood at 2.2.
Global value funds together with long-only investors are piling right in the middle of the index today, chasing big, liquid stocks attracted by cheap valuations, said Tetsuro Ii, CEO of Commons Asset Management.
Toshiba <6502.T> was one of the biggest gainers. Its shares rose more than 10 percent after the Nikkei business daily said it planned to pay a fiscal year-end dividend of at least 2 yen per share, its first in three years.
The Nikkei is still down more than 7 percent since January, under performing the MSCI world equity index <.MIWD00000PUS> which rose 1.7 percent. Financial, Utilities and energy sectors were seen as cheapest, with their price to book ratios standing at or below 1.
Nikkei futures in Chicago were up 3.2 percent at 9,540, while Osaka futures added 3.8 percent to 9,480. The broader TOPIC index <.TOP> rose 4.2 percent to 858.50.
YEN BELOW RECORD HIGH
The yen was slightly stronger against the dollar and euro, although investors wary of further intervention were reluctant to push it higher closer to 80 per dollar.
The yen was up 0.1 percent at 80.96 per dollar. It hit a record high of 76.25 last week before the intervention took it to 82.00. The yen rose almost 0.2 percent to 115.09 per euro.
Traders reported offers to sell dollars lined up from 82 yen up to 83.50.
A customer dealer at a major Japanese bank in Tokyo said the amount of dollar offers from customers at the 82 and 83 yen levels have doubled compared with Thursday when the triggers below 80 were hit as a result of awry derivatives bets.
Benchmark Japanese government 10-year bond futures fell 0.28 point to 139.46.
Investors are concerned that the cost of Japan's triple disaster of earthquake, tsunami and nuclear emergency could be as much as $200 billion, exceeding that of the 1995 Kobe earthquake, a factor which would weigh on the JAB market.
A senior ruling party lawmaker was quoted as saying on Monday that large supplementary budgets are needed by June to help with reconstruction.
The Bank of Japan offered to inject 2 trillion yen of cash in same-day operations to stabilize the money market, extending its offer for six business days in a row and providing further support to general risk appetite.
As a result, current account deposits at the BOA is expected to rise to a fresh record high of 43.6 trillion yen, exceeding levels seen in March 2004 when the central bank was adopting quantitative easing.
The 10-year yield on the cash bond was up 4 basis points to 1.245 percent.
The 10-year yield is likely to stay around 1.2-1.3 percent as things are calming down a bit. Many investors do not want to trade actively ahead of their book-closing (at the end of March), said Ruixue Xu, rate strategist at RBS.
There's talk about possible extra budget and shortfall in tax revenue. But it's still not clear how many bonds they will need to issue... My guess is that the market can absorb an extra issue of about 10 trillion yen without major shocks.
(Additional reporting by Chikafumi Hodo, Masayuki Kitano and Akiko Takada; Writing by Natsuko Waki)