The Nikkei stock average rose on Wednesday following news that Italy's prime minister would resign, paving the way for austerity reforms to ease the euro zone's debt crisis, while scandal-hit Olympus Corp skidded another 20 percent after it admitted it hid losses.

Nomura Holdings rose more than 4 percent, regaining some of its nearly 15 percent drop in the previous session, after it said media reports speculating it was involved in hiding Olympus' losses were not based on fact.

Italy's embattled prime minister Silvio Berlusconi said he would leave office after parliament approves a budget law that includes reforms demanded by Europe.

Investors seem reassured by developments in Italy as of now, but so many doubts remain about the situation there and progress on the debt issue that it's hard to be optimistic from now, so there is still a mood of caution, said Takashi Ushio, head of investment strategy division at Marusan Securities Co.

The Nikkei average added 1.2 percent to 8,755.44, ending above its 25-day moving average, now at 8,743, which some strategists view as a bullish signal.

The broader Topix index gained 1.5 percent to 747.40. Volume was in line with recent levels, with 1.8 billion shares changing hands, compared with Tuesday's 1.85 billion shares. About 5 shares rose for each one that fell.

Shares of Olympus fell by their daily trading limit to 584 yen, after also sliding by their limit the previous day after the camera and endoscope maker said for the first time that contentious acquisitions helped it cover losses on securities investments dating back to the 1980s.

Stock lending brokerage Japan Securities Finance on Wednesday stopped taking new orders to borrow Olympus shares for margin selling due to abnormally large interest in borrowing in the shares.

The Tokyo Stock Exchange has not taken any action on Olympus and its shares were trading as usual on Wednesday.

If Olympus were to be eventually delisted, market participants said possible candidates to replace it in the Nikkei average include Yamaha Motor Corp, which rose 4.7 percent to 1,135 yen, Elpida Memory, up 4 percent at 419 yen, and JVC Kenwood, up 3.5 percent at 329 yen.

Nomura rose 4.1 percent to 255 yen. Olympus is a client of Nomura, although Nomura was not a financial adviser on any of the deals that are currently at the centre of the Olympus scandal.

Sumitomo Mitsui Financial Group (SMFG), Olympus' main lender, topped the main board as the heaviest traded issue by turnover, with more than three times its average 30 day volume changing hands.

SMFG shares, which were up more than 2 percent in early trading, suddenly dropped 5 percent in the afternoon to 2,014 yen, its lowest level since the banking group was formed in 2002. The issue ended up 0.5 percent at 2,130 yen.

Toyota Motor Corp added 1.6 percent to 2,542 yen, after a source said Japan's top automaker has told its parts suppliers it aims to return to normal production levels in Japan in early 2012, restoring output that has been hit by the impact of Thai floods.

On Tuesday, Toyota posted a 32 percent drop in quarterly operating profit and withdrew its full-year profit forecasts as it assessed the impact of the floods.

Automaker Isuzu Motors Ltd gained 4.5 percent to 352 yen, after posting higher profits and raising its full-year guidance on Tuesday.

Sharp Corp rose 1.4 percent to 721 yen after Deutsche Securities upgraded its recommendation on the electronics maker to hold from sell and raised its target price to 720 yen from 620 yen.