(Reuters) - Japan's Nikkei share average hit a two-month high on Friday, boosted by encouraging results from U.S. banks Morgan Stanley (MS.N) and Bank of America (BAC.N), while near-term concerns over Europe eased after successful Spanish debt auctions.
Nomura Holdings (8604.T), Japan's top brokerage, advanced 3 percent and Daiwa Securities Group (8601.T) added 4.7 percent.
The three major Japanese banks were among the heaviest traded shares by turnover on the main board, with Mizuho Financial Group (8411.T), Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitusi Financial Group (8316.T) up between 3.5 and 5.1 percent.
Japan's financial shares are mirroring the broader market, as investors who had previously consolidated their positions in defensives are buying back shares that were heavily sold off last year, said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.
Fundamentally, it is a reversal in short-covering. If this rally was a real sign of bullish sentiment, electronics and machinery stocks would be gaining much more.
Among electronic and machinery makers, TDK Corp (6762.T), Sony Corp (6758.T), Sharp Corp (6753.T) and industrial robot maker Fanuc (6954.T) climbed between 1.6 and 2.7 percent.
The Nikkei <.N225> had advanced 1.3 percent to 8,754.71 by the midday break, extending its rise for the fourth straight session. The next major targets for the benchmark are its 200-day moving average near 9,115 and its high from last October's rally of 9,152.39.
The Nikkei has jumped through major resistance levels, first the 25-day (moving average), the 75-day and the upper limit of the Ichimoku cloud, pushed up by blue chips ... There is a feeling that it may be able to test the 9,000 level sometime soon, said Toshiyuki Kanayama, senior market analyst at Monex Inc.
The broader Topix .TOPX gained 1.6 percent to 752.56.
Nomura analysts were upbeat on Japanese stocks, recommending investors increase their weightings of high beta names, which tend to outperform in good times but underperform when the economy is bad, in anticipation of an upswing that it expects to be driven by foreign investors. They favor trading companies and exporters.
The majority of global investors appear to be underweight Japanese equities, and historically such times have proved to be good opportunities for buying Japanese stocks, they said in a report.
Valuations for Japanese stocks are looking increasingly attractive (compared) to those for global stocks. We estimate that profit growth at Japanese companies will be strong in 2012 relative to global companies, and we think this has yet to be factored in by the market.
Data from Thomson Reuters StarMine showed that stock valuations on the Nikkei at the Thursday close implied a five-year earnings per share (EPS) compound annual growth rate for the index as a whole of minus 0.7 percent.
That meant the market was pricing the index as if EPS growth would be negative 0.7 percent every year over that five-year period, on a compound basis.
Among the various sectors on the Nikkei, investors were most downbeat on financials, which had an implied five-year EPS compound annual growth rate of minus 5.4 percent.
On the other hand, the market was pricing the consumer staples sector at an EPS growth of 8.9 percent every year over the next five years, the StarMine data showed.
(Editing by Joseph Radford)