The Nikkei average rose 1.33 percent to its highest close in three months on Tuesday as investors returned to Canon Inc and other blue chip shares with solid profit prospects, while higher oil prices helped boost energy stocks.
The yen's weakness against the euro also helped companies with exposure to European markets such as Olympus Corp and Mazda Motor Corp, market participants said. The euro is hovering near its highest level against the yen since it was launched in 1999.
A rebound in oil prices is a worry but investors are now focusing more on corporate earnings, said Yasuo Yabe, director of sales at Meiwa Securities. "The fact that the Nikkei rode out a spike in oil prices shows that investors are paying heed to earnings and scooping up stocks," he said. "They rather see a buying opportunity when the market falls."
The Nikkei gained 212.13 points to 16,181.17, its highest close since May 17. The benchmark now has returned to positive territory for the year, adding 0.4 percent since January. The broader TOPIX index was up 1.08 percent at 1,641.77, also its highest close since May 17.
Takashi Matsumoto, chief strategist at Okasan Securities Co Ltd, said the Nikkei has added about 4,000 points in the past year, although the price-earnings (PE) ratio for its 225 components grew only to 20 times from about 18 times. The PE ratio expanded to as much as 25 last year, so the Nikkei may again test higher from here on, Matsumoto said.
Meanwhile, Masayoshi Okamoto, head of dealing at Jujiya Securities, is cautious and said the market may be at the upper end of its trading range. The issue of Iran's nuclear programme will also weigh on the market, he said. Canon gained 1.4 percent to 5,670 yen and Honda Motor Co Ltd added 1.8 percent to 3,950 yen.
Olympus, a maker of digital cameras and medical equipment which made about a quarter of its sales in Europe on a consolidated basis last business year, rose 4.4 percent to 3,340 yen, becoming one of the best performers among the Nikkei 225 stocks.
"The euro seems to be staying strong against the yen for a while this is good for companies doing business in Europe," said Yabe of Meiwa Securities. In the energy sector, INPEX Holdings Inc, Japan's biggest oil and gas exploration firm, gained 1.9 percent to 1.06 million yen after US crude oil futures jumped more than $1 on Monday as Iran, the world's fourth-largest oil exporter, said it would press ahead with its nuclear programme.
Likewise, shares of Nippon Oil Corp, Japan's biggest oil distributor, surged 2.8 percent to 945 yen. Shares of Kiyo Holdings Inc jumped 7.2 percent to 209 yen after the regional lender said on Tuesday it may apply for a public fund injection.
Business daily Nihon Keizai reported that Kiyo Bank, a unit of Kiyo Holdings, is planning to apply for a public fund injection of 20-30 billion yen ($172-258 million) to shore up its capital and clean up bad loans.
Trade volume rose from the previous session, with 1.66 billion shares changing hands on the Tokyo exchange's first section, although that was still below last week's daily average of 1.78 billion shares. Advancing shares beat decliners by a ratio of more than three to one.