The Nikkei index at the Tokyo Stock Exchange added 170.54 points at 8,776.16 by the lunch break. The broader Topix index of all first-section issues gained 14.32 points or 1.93 percent to 755.87. Tokyo financial markets were closed on Monday for a national holiday. "Extreme market pessimism seems to be receding," said Cosmo Securities strategist Toshikazu Horiuchi told Dow Jones Newswires. "While we need to remain cautious, Japanese stocks are nevertheless undervalued." The early gains came after stocks in the United States and Europe rallied in response to a German and French pledge at the weekend to find a solid plan to address the eurozone crisis and shore up European banks within weeks. The Dow Jones Industrial Average climbed 2.97 percent to finish at 11,433.18. "No specific measure (on Europe) has been spelled out yet, so the buying is mostly driven by expectations that various policies to resolve the European debt problem will be worked out," said Yutaka Miura, a senior technical analyst at Mizuho Securities. Miura also said investors were closely watching the start of the third quarter corporate earnings reporting season in the United States, with Alcoa (AA) scheduled to release its results later in the day. Financial and banking shares were higher amid expectations for capital injections into European banks. Mitsubishi UFJ jumped 2.43 percent to 336 yen and Sumitomo Mitsui climbed 2.30 percent to 2,129 yen by noon. Exporters were also strong as Sony rose 5.22 percent to 1,489 yen with Toyota up 2.11 percent at 2,603 yen. Barclays Capital chief Japan strategist Masafumi Yamamoto suggested the euro may resume its recent downward trend in the near term. Despite the plan from Germany and France to stem Europe's debt problems, "we haven't had any details about how to solve issues regarding the second batch of the rescue package to Greece and fund injections to banks," Yamamoto said. The euro softened Tuesday morning to $1.3634 and 104.56 yen in Tokyo trade from $1.3645 and 104.60 in New York late Monday. The dollar was around 76.65 yen early Tuesday, much lower than the average 81.15 yen that large manufacturers have set for their business plans for the current fiscal year.