The Nikkei average closed up 1.49 percent on Friday, the first day of the fiscal second half, as a strong reading in the Bank of Japan's "tankan" business survey prompted investors at home and abroad to jump into the market.
The quarterly tankan's headline diffusion index (DI) for sentiment at large manufacturers improved to plus 26 in September from plus 22 in June, compared with the market's consensus forecast of plus 23.
The Nikkei finished up 161.60 points at 10,985.17 as investors found bargains among banks and other domestic demand-oriented stocks, cheered by the headline DI figure rising to its highest in 13 years. The broader TOPIX index advanced 1.38 percent to 1,117.29. The Nikkei rose for a second session after sliding over 500 points in a nine-session losing streak to Wednesday, when it hit a six-week closing low.
But it failed to break the psychological barrier of 11,000, reflecting investor caution towards the market and the Japanese economy amid high oil prices and signs of a slowdown in the global production cycle, analysts said.
Though the tankan was stronger than anticipated, the DI - derived by subtracting the percentage of companies downbeat about their business conditions from those that are upbeat - for three months ahead was plus 21, suggesting sentiment is peaking.
Other economic data on Friday drew a sluggish picture for consumer spending, with average spending by Japanese wage earner households falling a real 0.2 percent in August from the same month last year. The nation-wide core consumer price index (CPI) fell 0.2 percent in August year-on-year. The unemployment rate fell to 4.8 percent in August from 4.9 percent in July.
But many analysts said they were optimistic about Japan Inc as years of restructuring and a rise in M&As have left many firms in much better shape even with limited growth in revenues.
Trading was active, with 1.485 billion shares changing hands on the first section, the biggest total since September 15. Advancers outnumbered decliners 1,206 to 281.
The start of October, which marks the beginning of the third quarter of 2004 for foreign fund managers, also saw some of them putting fresh money into Japanese shares, analysts said.
Some foreign investors, in particular European funds, had recently reduced their weightings on Japan to underweight following a slew of disappointing economic data.
The end of the April-September fiscal first half on Thursday saw the Nikkei register a loss of 7.61 percent for the half year, following a 14.6 percent jump in the six months to March 31.
Investors' current favourites include energy and resources companies as well as general trading firms, given high oil and commodity prices. Mitsubishi Corp, Japan's biggest trading firm, rose 3.69 percent to 1,235 yen and rival Mitsui & Co Ltd was up 2.93 percent at 950 yen.
Major oil refiner and copper smelter Nippon Mining Holdings Inc climbed 5.91 percent to 591 yen after hitting a life high since its listing in 2002 of 599 yen.
Mizuho Financial Group, Japan's biggest bank by assets, rose 4.35 percent to 432,000 yen. The number-one regional bank, Bank of Yokohama Ltd, jumped 5.91 percent to 627 yen.
But institutional buying may not be sustainable at current levels. A Reuters survey on Friday showed fund managers based in Japan are turning to bonds and away from stocks, particularly domestic ones.