The Nikkei stock average climbed back above 10,000 at one point on Monday, the first time in three days, helped by short-covering and futures-led buying after top US lawmakers reached an agreement to reduce the deficit and avoid a default.
Banking stocks led gains after first-quarter earnings results showed banks making better-than-expected progress towards their full-year estimates with Mitsubishi UFJ Financial Group jumping 4 percent after net profit tripled.
But analysts said the market is unlikely to gain much more momentum ahead of US unemployment data on Friday as investors are still sceptical about the health of the US economy, adding that the benchmark index will probably trade around 10,000 for much of this week. President Barack Obama announced a last-minute deal to raise the US borrowing limit and avoid a catastrophic default and he urged lawmakers to "do the right thing" and approve the agreement.
"Obama's remarks may be enough for the Nikkei to regain the last three days of losses, but today's gains will likely reflect temporary relief, not solid confidence that all the negative elements in the US economy have been priced in," said Tsuyoshi Kawata, a senior strategist at SMBC Nikko Securities. The benchmark Nikkei rose as high as 10,040.13, though later gave up some gains to close up 1.3 percent at 9,965.01. The broader Topix index gained 1.2 percent to 851.70.
Concerns also remain about whether the US debt deal will be sufficient for the United States to avoid a downgrade in its sovereign credit rating. Standard & Poor's has warned it may cut the United States' top AAA credit rating even if a deal on raising the government's debt ceiling is not accompanied by a credible plan to cut the deficit.
"When you look at the US economy in the long-term, the fundamentals for the US stock market seem far from attractive," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. The US economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising the risk of a recession if a stand-off over the nation's debt does not end quickly.
Among banks, Mitsubishi UFJ Financial Group , the most actively traded stock by turnover, rose 4.1 percent to 408 yen after net profit surged on a conversion of its preferred shares in Morgan Stanley into common stock which raised its stake in the Wall Street firm to 22 percent. Although profits at the operating level for Japan's big three banks showed declines, their progress towards their full-year outlooks was faster than expected, analysts said.
Goldman Sachs analyst Katsunori Tanaka also said that bank lending at home is expected to rise during the second half due to higher loan demand for reconstruction after the March quake as well as lending demand from power companies. Futures-led buying pushed up industrial robot maker Fanuc, the stock with the biggest weighting in the Nikkei, to a life-time high of 15,420 yen although it later ended up 4.6 percent at 15,280 yen.
Fanuc was also helped by a Nikkei report, which said the company has been enjoying strong sales of its machine tools in China, and expects record net profit for the April-September first half. The dollar was at 77.69 yen compared with 76.89 in New York late Friday when it hit a four-month low of 76.70, lifting exporters. Fuji Electric rose 4.4 percent to 262 yen after the Nikkei business daily said the company had developed a gadget that would enable radiation in fresh food to be measured in seconds, without removing packaging. Volume was moderate, with about 1.9 billion shares changing hands on the Tokyo stock exchange's main board, slightly above last week's daily average of 1.7 billion shares.
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