Tokyo's Nikkei share average finished just below 12,500 on Tuesday, booking its highest close in four years after more buying by foreign investors buoyed non-bank financial firms and lifted the benchmark 0.16 percent.
The Nikkei's close was well off the day's high, however, after late profit-taking pushed it below 12,600, which it topped in earlier trade.
Tech stocks were also among the gainers, with some chip-related issues such as Tokyo Electron Ltd boosted by growing investor optimism about the sector's business outlook.
Banks, which have been feted by foreign investors in recent sessions, saw their popularity wane after rising to a four-year high earlier in the session.
"Without a doubt this has been a market driven by expectations - expectations the economy will emerge from a soft patch and that that will benefit corporate profits," said Junichi Misawa, senior fund manager at STB Asset Management.
"Investors are focusing for the moment on stocks that are easily lifted when the economy rises, such as banks and brokerages but there doesn't seem to be any other factor except that demand is strong," he said.
The Nikkei finished up 20.42 points at 12,472.93, its highest close since July 5, 2001. It had risen as high 12,612.16 in early afternoon trade.
The broader TOPIX index finished up 0.17 percent at 1,272.00, also its highest close since July 5, 2001.
Foreign investors have been at the heart of the Nikkei's recent rally.
They bought a net 1.1 trillion yen of Japanese shares in July, their highest net monthly total since March last year. They equalled that net buying in the first two weeks of August, exchange data showed.
Non-bank financial firms had been the focus for much of the day, although they too trimmed some gains in late trade.
Consumer-finance firm Acom Co Ltd gained 2.2 percent to 7,300 yen, while rival Aiful Corp added 2.3 percent to 8,570 yen.
Tokyo Electron, the world's second-largest supplier of tools used to make microchips, gained 0.9 percent to 6,430 yen after industry group data on Tuesday showed the utilisation rate of the world's microchip factories rose in April-June for the first time in four quarters.
Rohm Co Ltd, which makes resistors and semiconductor devices climbed 2.2 percent to 10,190 yen.
Retailers also gained, extending their recent advance on optimism about Japan's economic recovery.
On Tuesday, Deutsche Securities raised its target share prices for several retailers, citing strong earnings prospects.
Sumitomo Mitsui Financial Group Inc, the No 3 lender, fell 4.2 percent to 891,000 yen. Fourth-ranked UFJ Holdings Inc fell 3 percent to 670,000 yen. Mitsubishi Tokyo Financial Group Inc, Japan's second-biggest bank, fell 2.7 percent to 1.09 million yen.
Square Enix Co Ltd rose 1.8 percent to 3,050 yen after Japan's No 2 videogame maker said it would offer to buy game machine maker Taito Corp in a deal worth about $611 million that would boost its product line-up. Taito rose 12.4 percent to 181,000 yen. Volume was high, with 2.24 billion shares changing hands, well above last year's daily average of 1.45 billion shares.
Advancers beat out decliners 812 to 692.
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