Tokyo's Nikkei average ended higher for the third straight session on Tuesday amid a growing consensus that Japanese shares would catch up with gains in overseas stock markets despite recent poor news on the economy. Banking shares such as Mizuho Financial Group Inc led the way and Trend Micro Inc jumped after sealing a deal to supply anti-virus scanning for Microsoft Corp's Hotmail e-mail service.
But drug firms were sold for a second day after Takeda Pharmaceutical Co said it would halt the development of a diabetes drug due to safety concerns, the latest in a series of sour product news in the sector.
The Nikkei finished up 0.2 percent or 22.5 points at 11,125.92, its highest close since November 17 and adding to a 1.64 percent rise in the previous two sessions.
The broader TOPIX index was up 0.59 percent at 1,116.34.
"Recent bad economic news has been factored in. Exports to the US and China during this latest quarter don't look to have done too badly at all," said Toru Ohara, chief investment officer at Franklin Templeton Investments Japan.
"This has helped a growing market view that Tokyo stocks have lagged other markets, but there's still uncertainty over the dollar/yen rate and that's why banks have been singled out today," he said.
The Nikkei has risen just 0.4 percent over the past three months, in contrast to a 4.1 percent rise in the Dow Jones Industrial average and a 10.8 percent gain in the Nasdaq Composite Index
Last week a central bank survey showed corporate sentiment had worsened and this week the government downgraded its view on the economy for the second straight month, taking a more cautious view on personal consumption and production.
The yen's recent strength against the dollar has hurt exporters since it makes their goods more expensive overseas, but banks are less affected.
Analysts said heavy net buy orders via foreign brokerages before the opening gave a cue for more buyers to enter the market, boosting banks and other blue chip stocks.
Honda Motor Co rose 1.2 percent to 5,280 yen and office equipment maker Canon Inc climbed 0.9 percent to 5,430.
Shinsei Bank, which booked a strong rise in first-half profit on Monday, helped by robust retail and investment bank earnings and a drop in bad loans, climbed 2.4 percent to 685 yen.
Trading was active, with 1.4 billion shares changing hands on the main board, up from Monday's 1.23 billion.
Gainers outnumbered decliners 1,179 to 321.
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