Japanese stocks closed higher on Monday as buyers returned to bank and high-tech shares, counting on a steady recovery in the economy and hoping that three Japanese hostages in Iraq would be released soon.
The benchmark Nikkei closed up 1.22 percent or 145.19 points at 12,042.70. It lost 195 points on Friday on news that a militant group was holding the Japanese civilians and had threatened to kill them if Japanese troops did not leave Iraq.
The broader TOPIX index rose 1.32 percent to close at 1,206.57, bouncing back from a 1.57 percent fall on Friday.
"Investors are betting that the hostage crisis will be resolved shortly without worsening further," said Tsuyoshi Nomaguchi, a senior strategist at Daiwa Securities.
"Market sentiment has pretty much returned to the pre-hostages level and optimism about an economic and corporate earnings recovery is prompting investors to chase laggards."
Analysts said buyers appeared to be returning to the market on hopes that the hostages would be released soon and the episode would not have any political repercussions.
Some had said a mishandling of the crisis could damage support for Prime Minister Junichiro Koizumi, whose ruling Liberal Democratic Party faces an Upper House election in July.
There were various reports over the weekend and on Monday that the three were safe and would be released, but there was no confirmation of that by the time the market closed on Monday.
Trading volume fell, with 1.489 billion shares changing hands on the first section, down from Friday's 1.760 billion and the lowest since March 31. Gainers overwhelmed decliners 1,292 to 190. Analysts said the fall was mainly due to the absence of foreign investors because of the Easter holiday.
Mizuho Financial Group Inc, the country's biggest bank, climbed 3.7 percent to 504,000 yen and rival Mitsubishi Tokyo Financial Group Inc rose 2.94 percent to 1.05 million yen.
Tokyo Tomin Bank Ltd, the only regional bank based in Tokyo, surged 14.5 percent to 2,725 yen after it lifted its net profit estimate because of a recovery in stock prices, which boosted its unrealised profits on shareholdings.
The banking sector sub-index climbed 3.85 percent, making it the best-performing sector on the day.
Travel-related stocks bounced back after being hit on Friday on concern that rising security fears might curb travel demand.
Japan Airlines System Corp, the country's largest airline, rose 1.74 percent to 350 yen, after losing 3.1 percent on Friday.
Fujio Ando, an equities analyst at Chibagin Asset Management, said the market was likely to advance further when foreigners returned and started chasing technology stocks that have bright earnings prospects.
"The Tokyo market has become a profit-driven market. Investors are keeping a close eye on corporate earnings and growth potential as the US earnings season kicks off this week and Japan's earnings season gets into full swing later this month," Ando said.
Toshiba Corp jumped 3.92 percent to 504 yen after the electronics conglomerate said on Friday it would invest heavily in semiconductors and displays, with the aim of doubling operating profit over the next three years. Following the plan, J.P. Morgan upgraded Toshiba to overweight from underweight.
Murata Manufacturing Co Ltd, a leading producer of electronic components, rose 3.1 percent to a 21-month high of 7,640 yen. Electrical engineering firm Yurtec Corp was up 6.24 percent at 511 yen after it said its net profit for last year would be nearly twice as much as forecast.
But Kenwood Corp sank 6.03 percent to 327 yen after the leading audio equipment maker cut its net profit estimate.
Investors still seemed to have an appetite for small and medium-sized companies that are less influenced by the performance of Wall Street and currency volatility. The Nikkei Jasdaq average, which covers all shares listed on the Jasdaq market for start-ups, climbed 2.35 percent to 1,899.79, a level not seen since May 2000.
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