The Nikkei average made a dramatic turnaround to hit its highest close in two months on Wednesday as surprisingly strong machinery orders data helped to reverse its early loss by as much as 1.45 percent.
The Nikkei finished the day 1.24 percent higher as machinery stocks like Fanuc Ltd bounced back from negative territory after the data which showed core machinery orders rose 8.5 percent in June from the previous month, well above economists' forecasts for a fall of 0.4 percent.
Growing optimism about the domestic economy also helped bank shares such as Mitsubishi UFJ Financial Group Inc (MUFG). But worries about the US economy, despite a pause in US rate increases on Tuesday, continued to weigh on shares of several exporters.
"The data put the domestic economy under a spotlight. It confirmed that a recovery led by capital spending is firmly in progress," said Yutaka Shiraki, senior strategist at Mitsubishi UFJ Securities. The Nikkei gained 191.93 points to end at 15,656.59, its highest close since June 5.
The broader TOPIX index rose 1 percent to 1,578.43, its highest close since July 11. Industrial robot maker Fanuc reversed early falls to end 1.2 percent higher at 9,400 yen. Mitsubishi Heavy Industries Ltd finished at the day's high of 472 yen, up 0.6 percent, as the rise in machinery orders for June was led by orders from the steel and electronic equipment sectors and auto industries. The pause in the Federal Reserve's two-year string of non-stop rate increases came as expected, but the US central bank left the door open to more credit tightening, quashing optimism about the US economy, a key market for Japanese goods.
"Concerns over the US economy had pulled down the Nikkei by more than 200 points. That initially looked a bit overdone," said Tsuyoshi Nomaguchi, strategist at Daiwa Securities.
Some analysts said Japan's strong capital spending during the April-June quarter has been somewhat factored into share prices. "This trend is likely to be maintained through the July-September quarter. But what is yet to be known is the latter-half of fiscal 2006/07," said Toru Kitani, senior investment manager at Sompo Japan Asset Management.
"Also valuations of cyclical growth stocks are far less attractive than before. Some people have already focused on these types since late July," he said, referring to shares of firms sensitive to economic momentum such as Komatsu Ltd.
Daiwa's Nomaguchi also said continued weakness in consumer spending is more of a market concern than capital spending and April-June gross domestic product data due on Friday is expected to show a slowdown in the pace of expansion.
Among other gainers, bank shares were higher on hopes of increased loan demand, with industry leader MUFG rising 2.6 percent to 1.59 million yen. Second-ranked Mizuho Financial Group Inc gained 1.6 percent to 938,000 yen. Suzuki Motor Corp jumped 2 percent to 2,800 yen.
Japan's top minivehicle maker after the market closed confirmed a newspaper report that it will build a new plant in Japan and said the plant for small cars, costing 60 billion yen ($520 million), is set to start operating in 2008 with an annual capacity of 240,000 units.
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