Tokyo's Nikkei stock average ended up 0.48 percent at a four-year closing high on Tuesday as investors bought Advantest Corp and other technology shares that had missed out on recent rallies.
Shipping firms and steel makers benefited from investor confidence that stronger earnings lay ahead and that their shares were relatively undervalued, analysts said. A major earthquake with a magnitude of 7.2 that jolted northern Japan around noon and was felt in Tokyo had limited impact on the market.
Analysts said some investors were trying to make money ahead of the September 11 general election in Japan because it was unclear what would happen after the vote, pushing up volume and turnover.
Daily turnover on the Tokyo Stock Exchange's first section, has been around 1.6 trillion yen ($14.64 billion) for the past several days, compared with the daily average of 1.06 trillion yen last August.
"Market players are trying to take chances before the election. Including foreign investors, these people are aiming for short-term gains," said Masaharu Sakudo, adviser at Tachibana Securities.
The Nikkei ended up 59.12 points at 12,315.67, the highest close since August 7, 2001. The broader TOPIX index rose 0.27 percent to 1,252.12, its best finish since July 6, 2001.
The electric machinery sub-index IELEC.has gained less than 1 percent this month, compared with a 12 percent rise in the insurance sector IINSU.and 9 percent in the banking sector BNKS.
Advantest, the world's largest maker of chip-testing devices, rose 1.8 percent to 9,030 yen while Canon Inc added 0.4 percent to 5,420 yen.
Chips-to-computers conglomerate Fujitsu Ltd rose on Goldman Sachs' upgrade to "outperform" from "in-line" but lost some gains as Deutsche Securities lowered its target price for the company to 560 yen from 600 yen.
Fujitsu ended up 0.9 percent at 645 yen.
Tohoku Misawa Homes Co Ltd jumped 11.6 percent to 355 yen on hopes for house-building demand.
Banks were among the notable losers, falling from recent highs after Goldman said in a separate report on Monday that it may move its sector rating to "underweight", after a recent rally by major Japanese lenders.
Mizuho Financial Group slipped 1.5 percent to 543,000 yen, after hitting this year's high of 552,000 on Monday.
The bright outlook for Japan's economy continued to support the stock market.
Morgan Stanley economists Robert Feldman and Takehiro Sato in a report dated Tuesday revised up their real GDP growth forecast for fiscal year 2005 ending next March to 2.5 percent from a previous estimate of 1.6 percent. Trade volume increased, with 2.02 billion shares changing hands, well above last year's daily average of 1.45 billion shares. Advancers swept past decliners, 1,047 to 484.