The Nikkei rose 2.6 percent on Friday as news that President George W. Bush will outline reforms to help homeowners with subprime mortgages sparked broad-based buying, and Dell Inc's earnings lifted high-tech stocks.
Merger hopes lifted paper stocks after news that Nippon Paper Group Inc, Japan's second-largest paper maker, may consolidate cardboard production with its smaller partner Rengo Co to cut back on excess capacity in a mature market.
The market was propelled up after the news that Bush would outline reforms on Friday intended to help homeowners with subprime mortgages avoid default.
Investors took this news favorably, said Tatsuyuki Kawasaki, a general manager at Mirai Securities.
It would be a different story though if the Fed decided not to cut interest rates as a result, he added.
The Nikkei advanced 415.27 points, or 2.57 percent, to 16,569.09. On the week, the benchmark gained about 2 percent.
The broader TOPIX index gained 2.55 percent, or 40.02 points, to 1,608.25.
Chisato Haganuma, chief strategist at the Financial and Economic Research Center of Nomura Securities said the subprime loan issue was unlikely to be that big a problem, especially over the longer term.
There are some problems with housing but the other parts of the U.S. economy aren't that bad, he told at a seminar.
Trade volume picked up with 1.8 billion shares changing hands. Advancers swamped decliners by a ratio of nearly 16 to 1.
After the market closed, Toyota Motor Corp said it expects its group's worldwide sales to expand to 10.4 million vehicles in 2009, up 18 percent from last year, as it grabs a bigger share in mature markets and taps growing demand in China and other emerging countries.
Consumer electronics maker Sony Corp surged 5.5 percent 5,580 yen and chip equipment maker Advantest Corp added 3.7 percent to 4,260 yen.
The dollar traded at around 116.20 yen keeping its distance from a 14-month low of 111.60 yen struck two weeks ago, giving support to the sector.
Shares of Fujitsu Ltd jumped 6.3 percent to 791 yen after the electronics conglomerate said on Thursday that Tokyo District Court upheld its complaint of dynamic random-access memory patent infringement against the Japan unit of Taiwan's Nanya Technology Corp
Technology stocks have been shunned by investors mainly due to volatile yen's moves, to which many high-tech companies are susceptible.
But following strong earnings from Dell, the world's second-largest personal computer marker, and upgraded profit forecast by Seagate Technology earlier this week, high-tech stocks may have won some confidence from investors, said Tomomi Yamashita, fund manager at Shinkin Asset Management Co. Ltd.
Industrial production data this morning was not bad and investors may have to rethink about technology stocks, he said.
Industrial production fell in July but that was largely due to an earthquake that disrupted auto production, and the government said output was expected to bounce back in August.
We need to see sales numbers for September ... but valuations for technology stocks look cheap, Yamashita added.
In the pulp sector, Rengo surged 7.6 percent to 723 yen, while Nippon Paper edged up 3.5 percent to 390,000 yen. Rival Oji Paper Co rose 2.5 percent to 579 yen. Chances of further mergers in the sector lifted other paper stocks.
(Additional reporting by Elaine Lies)