The Nikkei average rose 2.62 percent on Thursday after the Bank of Japan decided to end its five-year-old experiment with ultra-loose monetary policy, putting an end to weeks of market uncertainty.
TDK Corp rose after it said it will stop making recordable CDs and DVDs, while Canon Inc recouped earlier losses incurred after a downgrade by Merrill Lynch.
Investors were relieved to see that the BOJ will keep short-term interest rates around zero for now and will maintain its monthly outright buying of long-term government bonds at 1.2 trillion yen ($10 billion) to keep long-term interest rates low.
"They've changed their stance, which is good, which is a positive and the market has taken that positively, but the fact that they're not going to be doing any real tightening in the short term is also very positive," said Michael Coates, director of equity sales at KBC Financial Products.
The Nikkei gained 409.42 points to 16,036.91, the highest close in a week. It was also the biggest one-day percentage gain since February 21.
The broader TOPIX index climbed 2.21 percent to 1,641.01. Analysts said following Friday's special quotation (SQ) to settle March futures and options contracts on the Nikkei 225 stock average, the market will likely post gains.
"The event is over and the market will enter an upward trend," said Kenichi Azuma, equity strategist at Cosmo Securities Co Ltd, adding that a number of investment trust funds are expected to be launched toward the end of this month, which will aid the market.
Jun Nishizaki, chief portfolio manager at Nissay Asset Management, said with the central bank keeping short-term interest rates at around zero for now, price-to-earnings (PE) multiples should not deteriorate.
"The question now will be earnings per share (EPS), meaning how much corporate earnings would rise, especially as the new fiscal year will start in April," Nishizaki said.
Takahiko Murai, general manager of equities at Nozomi Securities, said that rising US long-term interest rates are a concern, although as long as the US stock market holds firm, the impact on the Japanese stock market should be limited.
TDK gained 3.6 percent to 8,440 yen. The company cut its 2005/06 net profit projection for the year ending March 31 by 15.7 percent on Wednesday and said it plans to stop making unprofitable recordable CDs and DVDs.
Canon, the world's top maker of digital cameras, recouped earlier losses and was up 0.3 percent at 7,320 yen. Merrill downgraded its rating on the company to "neutral" from "buy", saying the company may have a tough time achieving its 2006 earnings forecasts.
Shares in Nippon Sheet Glass Co Ltd jumped 5.7 percent to 523 yen as concerns about the glass maker's financial health eased. New bank borrowing used to finance the company's purchase of Britain's Pilkington Plc would amount to about 140 billion yen, which Nippon Sheet Glass should be able to pay off in a few years, Chief Executive Yozo Izuhara told Reuters in an interview on Wednesday.
In the steel sector, JFE Holdings Inc ended up 1.7 percent 4,290 yen. After the market closed, the world's fourth-biggest steel maker said it would aim to post a group recurring pretax profit of 500 billion yen in the year to March 2009, compared with its forecast for a 500 billion yen profit for the year to March 2006. Pioneer ended up 0.05 percent at 1,938 yen.
Trade volume rose with 1.82 billion shares changing hands, the highest in a week. Advancers swept past decliners 1,576 to 94.
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