The Nikkei average held on to recent gains on Wednesday, edging up for the second session and brushing off worse-than-expected earnings from blue chips like Honda Motor Co (7267.T), with some market players saying earnings gloom has already been priced in.
Optimism about Japanese equities and hopes for a better-than-expected recovery in the United States pushed the Nikkei to a 4.1 percent gain last month, its best January performance since 1999.
There is a lot of delayed investment. And there were a lot of reasons to delay investing, what with the worries about the third-quarter earnings, the remaining concerns about the European debt negotiation, said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.
But as these uncertainties slowly start to resolve themselves, market participants become more confident to exercise their improved optimism by putting money to work, said Worrall.
A Reuters poll showed that while Japanese fund managers cut their global stock weighting in January as worries about Europe persisted, they raised their weighting for Japanese stocks to a seven-year high, seeing them as relatively attractive.
The benchmark Nikkei .N225 edged up 0.1 percent to 8,809.79, still below its 200-day moving average around 9,082.
The broader Topix index .TOPX advanced 0.4 percent to 757.96.
Although major corporate earnings have been so disastrous, the fact that the benchmark can hold this level shows that investors are still looking at the 9,000 level and the 200-day moving average and are quite bullish, said Toshiyuki Kanayama, a senior market analyst at Monex Inc.
The benchmark was unmoved by the yen's strengthening during the session, even as it climbed against the dollar to levels not far from the record high it hit last October when Japan intervened in currency markets.
There is an expectation that there will be intervention (if the yen gains further) and the fact that U.S. stocks are treading in record high ranges are preventing people from selling, said Yutaka Miura, senior technical analyst at Mizuho Securities.
The Nikkei's 25-day moving average looked likely to break above its 75-day average this week to form a Golden Cross, a bullish technical sign for stocks.
But strategists cautioned against drawing quick conclusions, saying that a more important focus should be on whether the Nikkei can maintain its current momentum and remain above the 25-day average.
Trading volume improved on Wednesday, with 2.15 billion shares changing hands on the main board, ticking up from 2.07 billion shares on Tuesday.
With corporate earnings season well under way, market participants said the impact of last year's natural disasters in Thailand and Japan were within expectations.
Everyone was waiting to see all the fallout from the Thai floods and the March 11 disaster last year. Now that the results are out, investors have been able to acknowledge all the bad factors and buy back some of these stocks in expectation of growth, said Hajime Nakajima, a sales trader at Cosmo Securities in Osaka.
Out of the Nikkei companies that have reported quarterly figures so far, 63 percent have come in below market expectations, according to Thomson Reuters StarMine data. That compares with 36 percent of S&P 500 .SPX companies.
But there were strong gainers, including All Nippon Airways (9202.T), which jumped 6.8 percent after it hiked its operating profit forecast by nearly 30 percent.
Honda, trading at 50 percent above its average 30-day full day volume, slashed its annual profit guidance to 200 billion yen ($2.6 billion), its lowest level in three years, hurt by the cost of natural disasters and a strong yen.
But in an indication that the market was beginning to take these type of earnings figures in its stride, Honda's stock ended up 0.3 percent after falling as much as 2.8 percent in early trade.
Japan's banking subindex .IBNKS.T advanced 1.5 percent, with Mizuho Financial Group (8411.T) gaining 0.9 percent after it kept its profit forecast at 460 billion yen, with its overseas loan growth offsetting weak domestic demand.
Analysts said the financial health of Japanese banks was solid as they gain businesses from their European rivals that are pulling back their lending.
Mitsubishi UFJ Financial Group (8306.T) jumped 2.9 percent and topped the Topix core 30 list .TOPXC as the biggest percentage gainer ahead of its earnings announcement later in the day.
After the bell, Japan's No. 1 broker Nomura Holdings (8604.T) said it returned to a small profit in the latest quarter as a one-off sale of a restaurant chain helped offset the impact of the global downturn.
The modest upswing in profits still leaves Nomura, which ended up 0.4 percent, vulnerable to a possible credit downgrade by Moody's Investors Service, which put Nomura's debt on review in November.