The Nikkei stock average rose nearly 2 percent on Monday, shrugging off further yen strength and hits to production from Thailand's floods, after the weekend yielded signs of progress on a plan to contain the euro zone's sovereign debt crisis.
European Union leaders appeared closer on Sunday toward a plan to contain the euro zone's sovereign debt crisis, nearing agreement on bank recapitalization and leveraging their regional rescue fund.
There was more progress than expected. So markets are now reversing some of their earlier selling in which they were trying to price in the chance of some banks being unable to raise cash, said Ryota Sakagami, chief strategist at SMBC Nikko Securities.
But shares of management dispute-plagued Olympus Corp fell to their lowest in 13- years at one point in heavy trading. The issue was the top-traded share by turnover.
The Nikkei .N225 finished up 1.9 percent at 8,843.98, recouping more than twice the 0.8 percent it lost last week. The broader Topix index .TOPX rose 1.5 percent to 755.44.
The Nikkei broke above resistance at its five-day moving average, which is now seen as a support point at 8,744.
In another positive technical sign, the Nikkei rose above the bottom of the cloud on the daily Ichimoku chart at 8,791 on Monday, for the first time since the benchmark's sharp fall in August.
We have seen some solid U.S. economic data and corporate earnings. In addition, there is talk of QE3 by the Fed. I think the Nikkei could rise to around 9,000, said Masashi Futoi, head of cash trading at Tokai Tokyo Securities, noting that the Nikkei will be traded on par with book value there.
Nearly five shares rose for each one that fell on the main board, but only 1.34 billion shares changed hands, comparable to Friday's 1.32 billion shares and well below this year's average of 2.06 billion shares.
Investors are unwilling to take new positions until they know for certain what will develop in Europe's still unresolved situation, which is why trading has been so thin lately, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.
Still, short covering of stocks that touched multiyear lows this month helped lift the benchmark. TDK Corp (6762.T) rose 8.3 percent to 2,967, after falling to a more than 20-year low earlier this month on concerns about the European debt situation.
The European news was hopeful, and Wall Street rose on these hopes, so the Japanese market is now just catching up to overseas gains on short covering, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
But Japan faces its own challenges of the strong yen and the flooding in Thailand that is affecting some Japanese manufacturers, and these factors will keep Tokyo's gains in check, and bring investors back to a 'wait and see' mode while they watch to see how the European plan actually develops, he said.
The dollar dropped to an all-time low of 75.78 yen on Friday, but rebounded to trade around 76.30 yen on Monday.
Olympus ended down 10.7 percent at 1,099 yen after falling as much as 18 percent to 1,012 yen, its lowest level since March 1998.
Olympus shares have lost nearly 60 percent of their value, wiping out more than 375 billion yen of market capitalization, since the company fired its British chief executive on October 14. It accused him of managerial incompetence, only to see him turn whistleblower about a hefty $687 million payment to advisers on an acquisition deal.
Bridgestone rose 4.1 percent to 1,764 yen after the tyre maker said it aims to boost its operating profit to 10 percent of sales by 2016/17 from 5.8 percent in 2010/11 in its five-year plant.
Hitachi Zosen fell 2.7 percent to 107 yen after the shipbuilder slashed its operating profit estimate for the April-September period to 1.6 billion yen from 4.0 billion yen, and cut its revenue forecast to 125 billion yen from 134 billion yen.