The Nikkei share average ended up 2 percent on Tuesday at a three-week closing high on expectations that a pledge from Germany and France to come up with a plan this month to protect the region's banks will prevent Greece's debt woes from spreading.
The benchmark has gained about 5 percent from its intraday trough of 8,343 last Wednesday, its lowest since March 15 when it slumped to 8,227 in the wake of that month's devastating earthquake.
Industrial robot maker Fanuc Corp jumped on news it will replace Tokyo Electric Power Co in the Topix Core 30 index while shares of battered major exporters such as Sony , Komatsu and Honda outperformed, all climbing more than 5 percent.
Doubts about whether euro zone policymakers can actually muster a united response to the debt crisis are likely to cap the upside, although market participants differed on where resistance would hold.
Markets are rallying on hopes for policy, rather than an actual policy. There's still no guarantee there will be effective policy. The target for the Nikkei will be around 8,800 to 9,000 for the next few days, said Yutaka Miura, senior technical analyst at Mizuho Securities.
After a national holiday on Monday, the benchmark Nikkei added 168.06 points to 8,773.68, having risen as high as 8,806.44 in the morning session, its highest since Sept 16.
The broader Topix index rose 1.8 percent to end at 755.00.
The Nikkei climbed well above its 25-day moving average, now around 8,654, which is normally considered a bullish sign.
Immediate resistance is seen at an area defined by two peaks last month, 8,864 on Sept. 16 and 8,876 on Sept. 8.
The 50-day moving average, which the benchmark has not traded above since Aug. 4, is also an upside target at 8,874.
Some analysts think the rebound could extend to around 9,000, but more resistance looms there, such as the 38.2 percent retracement of the Nikkei's fall from July at 9,055, as well as the bottom of the Ichimoku cloud at 9,094.
Credit spreads (for banks) are still far from tight. It's hard to expect the Nikkei to move above 9,000 and stay there. A fall below 8,500 is more likely, said Ryota Sakagami, chief strategist at SMBC Nikko Securities.
Among exporters, Sony rose 5.7 percent to 1,496 yen while Honda, the most heavily traded share by turnover, gained 5.5 percent to 2,347 yen. Komatsu, the second most heavily traded issue by turnover, added 6.4 percent to 1,638 yen.
The latest news from Europe seems to have lifted expectations that the crisis there will not destabilise the financial system and drag down growth, so investors are buying back some of the shares they sold in recent weeks, said Yutaka Shiraki, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
Fanuc Corp added 4.3 percent to 11,450 yen and was the fifth-heaviest traded share by turnover, contributing the most to the Nikkei's gain.
Nikon Corp erased early gains and skidded 4 percent to 1,844 yen after it said it closed its digital SLR camera factory in Thailand on Oct. 6 due to flooding and does not know when it will restart.
The stock had risen as far as 1,956 yen, its highest since June 23.
Nidec gained 3.4 percent to 6,310 yen after the electric motor maker said on Friday it would increase its stock buyback plan to as much as 47 billion yen ($613 million), or as much as 4.14 percent of its outstanding stock.
Bank shares were mostly in line with the overall market, with the Tokyo Stock Exchange's banking subindex up 1.7 percent. Sumitomo Mitsui Financial Group added 2.7 percent to 2,137 yen and Mitsubishi UFJ Financial Group rose 2.4 percent to 336 yen.
Volume was relatively modest, with 1.57 billion shares changing hands on the Tokyo stock exchange's main board, below last week's daily average of 1.86 billion shares. About four issues gained for each one that declined.