Tokyo - The Nikkei average rose to its highest close in eight months on Thursday, buoyed by gains in undervalued financial shares and advances in European and US stocks after a successful bond auction in Portugal eased fears over the eurozone debt crisis.
Financials, which fuelled the Nikkei's climb the day before, extended gains as foreign investors added underweight banking stocks to their portfolios. Mitsubishi UFJ Financial Group, Japan's biggest bank by assets, gained 1.3%.
"The financial sector may be buoyed further in the coming sessions if earnings figures from the US financial sector show strength," said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.
The banking sector, which has gained 25% since November, is still considered undervalued as its price-to-book ratio stands around 0.7, underperforming the average PBR of 1.2 for the Nikkei 225 components. A share is seen as undervalued if the PBR is below 1.0.
The rally in the financial sector could spill over into other sectors, analysts said.
"After looking into financial firms and confirming recovery in the corporate sector, the next sector investors may look at could be leasing if companies decide to increase capital spending," Chisato Haganuma, chief strategist at Mitsubishi UFJ Morgan Stanley Securities, wrote in a report.
The property sector was also among the top gainers, adding 2.2%, as foreign funds piled into real estate shares supported by the Bank of Japan's asset buying scheme and as vacancy rates in high-grade buildings in Tokyo fell in the October-December quarter.
The property sector has gained around 20% since the scheme was launched in October, outperforming the Nikkei's 13% rise over the same period.
"The strong bond auction in Portugal has calmed the markets and with no major negative factors in sight, foreign funds continue buying lagging banking and property shares," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
Spain is expected to pay a premium to sell up to €3bn of five-year bonds on Thursday as it faces jittery debt markets for the first time this year.
"Foreigners are buying property, encouraged by the BOJ's scheme and because they seem cheaper compared to surging property shares in China," said Akino, who predicted that foreign buying would continue at least until June, provided that exchange rates remained steady around current levels.
The benchmark Nikkei ended up 0.7% or 76.96 points at 10 589.76. Immediate resistance looms at the May 13, 2010, high of 10 638.23. The next target eyed by investors is the 10 847.90 mark recorded on May 6.
The broader Topix added 0.9% to 937.74.
Nikko Cordial's Suezawa said that, if US earnings show brisk demand for consumer goods, investor interest in exporting manufacturers such auto and electronics makers could continue lifting the Nikkei.
"There are hopes that the Nikkei is on track to rise to 11,000 in the medium term and 12,000 by the end of the year," he said.
Resource and energy shares also posted strong gains as oil hovered around 27-month highs, with $100 a barrel looming for the first time since 2008 and as gold prices rose to a one-week high on Wednesday.
Inpex Corp, Japan's top oil and gas developer, gained 2.1% to ¥492 500, while trading houses rose. Marubeni, Japan's No.5 trading house, climbed 2.5% to ¥628 and No.4 Itochu added 2.9% to ¥910.
Chuo Mitsui Trust Holdings rose 5% to ¥354 and Sumitomo Trust & Banking gained 5.3% to ¥537 in heavy trade, after the Nikkei business daily said that the entity to be created in April by merging the two firms is considering a dividend payout ratio of 30%.
The companies were the two biggest percentage gainers on the Nikkei 225.
Trade was active with around 2.3 billion shares changing hands on the Tokyo Stock Exchange's first section, above last week's average daily volume of 2.0 billion shares.