The Nikkei average rose 1.7 percent on Wednesday to hit a two-month closing high as exporters such as Honda Motor surged on a softer yen and amid hopes for a US stimulus package to boost the economy. The benchmark logged its first seven-day winning streak in nearly three years, gaining 8.5 percent during the period, including two half-days of trading before and after the New Year holiday.
A newspaper report that Japan's government will seek to scrap capital gains taxes for foreigners investing in Japanese companies through funds also helped improve sentiment, market players said. They also said risk appetite was growing.
In active trade, the Nikkei climbed 158.40 points to 9,239.24, its highest finish since November 5. It booked its first seven-day winning run since March 24-April 3 in 2006. The broader Topix rose 1.4 percent to 888.25. Although the market welcomed the news about tax breaks for foreign investors, some said the market impact could be limited.
The dollar on Tuesday hit its highest against the yen since December 1, partly on expectations that a stimulus package planned by US President-elect Barack Obama will help the world's largest economy emerge from recession sooner than other industrialised nations.
Investors welcome a softer yen as it boosts exporters' overseas profits when repatriated. Shares of Japanese regional banks including Bank of Yokohama gained after the Mainichi newspaper said the government is looking at a plan to inject public funds into 40 or more regional banks, whose capital bases are being hurt by rising bad loans amid the financial crisis.
Shares of Honda soared 11 percent to 2,210 yen, while Toyota Motor Co jumped 4.9 percent to 3,200 yen and Nissan Motor Co shot up 9.7 percent to 374 yen. Tech shares climbed after their US peers rose as investors bet the sector would benefit from Obama's proposed package of spending and tax-cut measures that would total nearly $775 billion over the next two years.
The Philadelphia Semiconductor Index rose 5.1 percent on Tuesday. Canon Inc surged 11.5 percent to 3,310 yen and Sony Corp jumped 8.7 percent to 2,305 yen. Bank of Yokohama, Japan's largest local lender, gained 3.3 percent to 530 yen. Midsize lender Aozora Bank, which does business with many regional banks, rose 2.5 percent to 83 yen. Tokyo Tomin Bank gained 8.3 percent to 1,496 yen.
Among other notable stocks, Sharp Corp jumped 12.6 percent to 897 yen, after it said it would bring forward the start of a new domestic solar cell plant to the end of this year to meet growing demand world-wide for green energy to counter global warming.
Ricoh Co Ltd advanced 7 percent to 1,297 yen after Credit Suisse upgraded the stock to "outperform" from "neutral" and raised its target share price to 1,400 yen, saying firmness in the North American market could counter earnings concerns about its subsidiary Ikon.
After the close, Japan's second-largest retailer Aeon Co Ltd slashed its earnings outlook and said it may post its first annual net loss in seven years, hit by flagging sales, a writedown at US unit Talbots and accounting changes. The stock closed up 0.5 percent at 874 yen.