The Nikkei average rose 0.54 percent on Monday as firms with strong earnings prospects such as Honda Motor Co gained on chances they will benefit from new money entering the market at the start of Japan's fiscal year in April.
Technology stocks such as chip equipment maker Advantest Corp rose on a rebound in the US Nasdaq index, though E*Trade Securities Co Ltd and other online brokerage firms slid on concerns about growing competition in the sector.
"There is this vague hope about the start of the new fiscal year. I don't think institutional investors are in a rush to buy stocks, but they won't miss a buying opportunity if the market falls," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.
Kazuhiro Takahashi, general manager of the equity planning and administration department of Daiwa Securities SMBC Co Ltd, said the market appears set to advance after staying in a tight range for the past few weeks.
"I expect the Nikkei to aim for the 16,777 level, the year-to-date intraday high marked in February although right now active trade is mainly seen in the futures market," he said.
The Nikkei closed up 89.23 points at 16,650.10. The TOPIX index was up 0.27 percent at 1,693.84.
The market is keeping a close watch on the Federal Open Market Committee (FOMC) policy meeting on Monday and Tuesday.
Hiroyuki Nakai, chief strategist at Tokai Tokyo Securities, said there is a growing view that the Fed's cycle of interest rate rises may be nearing an end, with some data showing a slowdown in the US economy.
"If the rate rise concerns ease, helping US stocks, that should be good for the Japanese stock market as foreign investors play a big role here," he said.
Nakai also said the market was on a rise ahead of the Bank of Japan's release on April 3 of its tankan corporate sentiment survey.
"I think the key will be whether there is any improvement in small and mid-sized manufactures' sentiment and if the economic recovery is spreading," he said.
A Reuters poll of 25 economists on the tankan produced a median forecast of plus 23 for the diffusion index for large manufacturers, slightly higher than the plus 21 in December.
Honda, Japan's third-biggest auto maker, rose 1.5 percent to 7,330 yen, after earlier climbing to a record high of 7,390 yen. Toyota Motor Corp rose 0.6 percent to 6,390 yen.
Advantest gained 1.4 percent to 13,230 yen, and Tokyo Electron Ltd rose 0.8 percent to 7,550 yen. In the technology sector, Sony Corp may draw attention on Tuesday after the Financial Times and the Wall Street Journal said on Monday that German media group Bertelsmann is planning to sell its 50 percent stake in music company Sony BMG, which it owns together with Sony, to avoid a listing.
Property stocks extended gains, still benefiting from a government report last week that showed land prices in parts of Japan rose last year for the first time in 15 years. Sumitomo Realty & Development Co rose for a second session, up 1.7 percent to 3,040 yen.
Online brokerage firms came under pressure due to concerns about sizzling competition from Nomura Holdings Inc, Japan's biggest securities brokerage.
Nomura said on Friday it expects its new online venture Joinvest Securities Co to turn a profit by March 2008. It also said it hoped to have 500,000 accounts by March 2007, compared with more than 1.1 million accounts held as of February by E-Trade Securities.
E-Trade Securities, Japan's top online broker by market share, fell 4.1 percent to 258,000 yen, while its peer Monex Beans Holdings Inc down 3 percent to 162,000 yen.
Trade volume picked up with 1.6 billion shares changing hands, compared with 1.46 billion shares on Friday, which was the lowest total since July 26.
Advancers outnumbered decliners 1,123 to 461.
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