Tokyo stocks posted their biggest daily gain in nearly two months, rallying after global markets recovered from one of the most volatile weeks since the financial crisis, and boosted by better-than-expected Japanese GDP data.
Value-hunters chased machinery makers and carmakers after these sectors led hefty losses last week, with Fanuc Ltd rising almost 5 per cent, but some said their rebound may stall if the US economic recovery stays subdued and European debt problems deepen.
Boosting hopes for further gains in domestic-demand related shares, such as retailers like Fast Retailing , Japan's economy contracted much less than expected in the second quarter as output recovers from the devastating earthquake in March.
Analysts expect the world's third-largest economy to rebound in July-September, probably expanding at the fastest rate among major industrialised nations as exports and factory output return to pre-disaster levels.
"The Nikkei is likely to head north over the next month," said Makoto Kikuchi, CEO of Myojo Asset management.
"If upcoming economic data from the US is stronger than expected, stocks will rebound on hopes for further recovery. If it's bad, they will still rise - but on hopes for more monetary easing," he said, adding that the latter would provide a good opportunity to sell into rallies.
The benchmark Nikkei average closed up 1.4 per cent at 9,086.41, while the broader Topix gained 1.2 per cent to 777.12.
The Nikkei is still down 13 per cent from its pre-quake levels and 11 per cent off its post-quake high hit on July 8th. Asian stocks outside Japan are down 10 per cent in 2011, while the Nikkei is 11.3 per cent lower.
Reflecting concerns about the harsher environment for global cyclicals, Macquarie Securities downgraded Honda Motor to "neutral" from "outperform" and slashed its target price by a fifth to 2,750 yen.
"We are materially more bearish on the operating environment. We believe that consensus expectations for a product cycle-induced rally are too high, and earnings forecasts will have to come down," said Macquarie analyst Clive Wiggins in a note to clients obtained by Reuters.
Honda gained 3.4 per cent on the day, in line with other automakers, after having shed 12 percent last week - the most among major Japanese carmakers.
Investors have also worried about the impact of the strong yen on Honda's earnings and its relatively laggard recovery from post-quake supply chain disruption. Honda gets more than 80 per cent of its sales abroad.
The dollar today hovered at 76.90 yen , not far from the record lows of 76.25 yen.
Chartwise, analysts expected the Nikkei may post further gains if it can quickly claw back above its recent intraday high of 9,144 hit on Aug. 10.
"This would complete a short-term double bottom formation and rapidly strengthen the sense that the market had bottomed," said Nomura Securities analyst Shoichiro Yamauchi.
Other analysts said Tokyo stocks remained undervalued, with 65 per cent of stocks listed on the Tokyo stock exchange's main board trading below their book value, while the average price-book ratio of stocks on the S&P 500 is 1.9.
Trading was subdued due to Japan's summer "obon" holidays with only 1.5 billion shares changing hands on the Tokyo stock exchange's main board - the lowest in almost a month and well below last week's daily average of 2.4 billion shares.
Shares of Osaka Securities Exchange soared 9.1 per cent to 412,500 yen after the Yomiuri newspaper reported on Saturday that the Tokyo Stock Exchange plans to take it over via a tender offer.
Shares of mid-tier homebuilder SXL Corp rocketed 52 per cent to their daily limit high at 88 yen after electronics discount chain Yamada Denki Co said on Friday that it would launch a tender offer for the firm.
The offer to pay 62 yen per SXL share will remain open until October 4th. Shares of Yamada Denki were up 2.5 per cent at 5,830 yen.
Reuters
