The Nikkei share average rose 1.37 percent on Tuesday as investors returned to recently battered financial stocks, while Nippon Mining Holdings Inc and other resource-related shares rose on higher oil prices.
The yield on Japanese 10-year government bonds rose briefly to 2 percent for the first time since August 1999, but the stock market was unfazed due to expectations that the Bank of Japan is not likely to raise interest rates immediately.
"Rising bond yields are not a problem. Rather the stock market sees it as a reflection of Japan's economic recovery," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities Co Ltd. The Nikkei gained 232.50 points to 17,232.86, logging its biggest one-day percentage gain since April 6. On Monday, the Nikkei finished at its lowest close in more than two weeks.
The TOPIX index climbed 1.32 percent to 1,741.75.
Tatsuo Nishimura, a portfolio manager at Meiji Dresdner Asset Management, said hopes for strong earnings are lifting the market.
"High oil prices are certainly a burden for companies but the market looks quite buoyant. I think investors are scooping up stocks on expectations that corporate earnings numbers will be strong," he said.
The securities sector ISECU, which had underperformed the TOPIX index this month, rebounded with Nomura Holdings Inc adding 2.9 percent to 2,665 yen.
Daiwa Securities Group Inc rose 4.9 percent to 1,577 yen after Nomura Securities raised its earnings estimates for Daiwa, Japan's second-biggest brokerage.
Energy stocks advanced after US oil futures cleared $70 a barrel on Monday, nearly breaching an all-time high set in the days after Hurricane Katrina hit the US last August.
Higher oil prices - which boost corporate costs and crimp consumer spending - are a minus for most firms, but a boon for energy-related companies.
Shares in Nippon Mining Holdings, which owns Japan's fifth-largest oil refiner, rose 5.8 percent to 1,119 yen while Nippon Oil Corp, Japan's largest oil distributor, gained 1.7 percent to 942 yen.
Bank shares rang up gains after Lehman Brothers upped ratings and target prices for major banking groups. Mitsubishi UFJ Financial Group Inc (MUFG) added 1.7 percent to 1.85 million yen after Lehman raised its rating on the world's largest bank by assets to "overweight" from "equal weight".
Lehman also raised its target price for Mizuho Financial Group to 1.2 million yen from 1.1 million yen, helping to boost the stock 2.9 percent to 1 million yen.
A couple of technology stocks may draw attention after their earnings revisions.
Elpida Memory Inc, a semiconductor maker, said after the market closed that it had revised its 2005/06 group net forecast to a loss of 4 to 4.4 billion yen from its previous estimated loss of 2 to 6 billion yen. Elpida closed up 0.43 percent at 4,640 yen.
Meanwhile, Fujitsu Ltd raised its earnings forecasts for the year to March 20, 2006, estimating a group net profit of 68 billion yen compared to its previous projection of 50 billion. Fujitsu ended up 0.53 percent at 955 yen.
Trading volume was higher, with 1.59 billion shares changing hands on the Tokyo exchange's first section, although that was still well below last year's daily average of 2.07 billion shares. Gains outnumbered declines by a ratio of nearly 5 to 1.
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