Japanese shares closed at an eight-week high on Friday, adding to gains the previous day, on expectations a key central bank survey due next week will show companies are strongly optimistic about business conditions.
Investor appetite for bargains remained solid, propping up some bank shares and high-tech stocks, after a slew of strong data recently underlined views that Japan's economic recovery is firmly on track.
But some investors were nervous about building positions as the dollar weakened against the yen and as geopolitical tension increase, limiting gains. The Nikkei average finished up 0.31 percent at 11,780.40, its highest close since April 28.
The broader TOPIX index was up 0.30 percent at 1,172.44. The Bank of Japan's quarterly "tankan" survey of corporate sentiment, due on July 1, will probably show a sharp improvement in the way companies feel about business conditions.
A Reuters poll produced a median forecast have plus 17 for the tankan's headline figure, the diffusion index (DI) for large manufacturers, up from plus 12 in the March survey. It would be the highest reading since August 1991.
"People are talking about a surprisingly strong number, even 20 or more (in the DI for large manufacturers)," said Ken Masuda, senior dealer in equities at Shinko Securities. "We are now factoring this in, albeit slowly, since a stronger-than-expected tankan figure would result in a jump in bond yields," he said.
Analysts said gains in some bank shares were helped by a rise in Japanese government bond (JGB) prices, which eased concern over possible losses at banks on their huge holdings of JGBs.
The yield of the key 10-year JGB was down seven basis points at 1.835 percent in late trade after government price data showed deflationary pressure still plaguing the economy.
Mizuho Financial Group, Japan's biggest banking group by assets, was up 3.15 percent at 458,000 yen, adding to a 3.26 percent rise the previous day following Standard & Poor's upgrade in its credit rating on Mizuho's core bank unit.
S&P also raised ratings on the other seven major banks. Takefuji Corp, Japan's biggest consumer finance company, climbed 3.95 percent to 7,900 yen.
A newspaper reported that the company's top shareholders are negotiating with five foreign investors including Citicorp Inc of the United States to sell them a 33 percent stake for 300 billion yen ($2.8 billion).
Laggards in the technology sector were also sought, with electronics components maker Kyosera Corp rising 2.22 percent to 9,220 yen. But several exporters slid as the dollar's weakness against the yen and rising geopolitical tensions cast a shadow over demand for their products.
Security fears were underpinned by attacks on Thursday in Iraq that killed about 100 people and blasts in Turkey before a visit by US President George Bush to Ankara and a Nato summit in Istanbul.
The violence, coming as investors were holding their breath ahead of the handover of power in Iraq next week, sent the US dollar sharply lower against other major currencies.
The dollar was trading at 107.55 yen after skidding to 107.02 yen in US deals on Thursday. "Investors do worry about geopolitical risk as the handover is very unlikely to stop terrorist attacks," said Shiroishi Nishi, general manager of equity marketing at Nikkei Cordial Securities.
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