Japan's Nikkei share average finished at a two-month high on Wednesday, driven by energy and resource companies following a rise in oil prices and bolstered by improved risk appetite amid expectations that central banks will act to support flagging global growth.
But the Nikkei's rally is heading towards major resistance levels, including the 75-day moving average, ahead of key events later in the week including a European Central Bank policy meeting on Thursday and US employment data.
The Nikkei rose 0.4% to 9,104.17, its highest close since May 8, while the broader Topix index firmed 0.2% to 778.70, also a two-month high.
"The Nikkei has been rallying, but somehow it lacked strength with trading volume still low. We are likely to see heavy selling above the current levels," said Hiroyuki Fukunaga, chief executive of Investrust.
Wednesday's trading volume was low, with 1.50 billion shares changing hands on the Tokyo Stock Exchange's main board, about three quarters of the average volume so far this year. Volume has been below the average for most of the past three weeks.
Looming above the Nikkei is its 75-day moving average at 9,173. Resistance is also seen at 9,250, the 50% retracement of its slide from a one-year high on March 27 to a six-month closing low of 8,295.63 on June 4.
"The rebound has certainly been very rapid and strong, and so if US unemployment figures, the ECB decision or Chinese GDP data disappoints, then another selloff is possible," said Ryota Sakagami, chief strategist of SMBC Nikko Securities.
Resilient domestic demand
Trading and resource-related companies were the biggest gainers after oil prices jumped to a one-month high. Mitsubishi Corp rose 2.9%, while rival Mitsui & Co Ltd gained 2.3%. Oil and gas developer Inpex Corp rose 2.9%.
Construction machinery maker Komatsu Ltd advanced 2%, while industrial robotics maker Fanuc Ltd gained 1.6%, partly helped by hopes of increased demand as Japan's post-tsunami reconstruction gathers pace over the summer.
"The market has become a lot more risk-on and is becoming more resilient to developments overseas because the gains are led by companies relying on domestic demand," said SMBC Nikko Sakagami.
Recent gainers such as banks and real estate companies slipped on Wednesday, but expectations of firm domestic demand - relative to worries of a slowdown outside Japan - could underpin the market, some market players said.
Convenience store operator Lawson Inc fell 2.3% on profit-taking after briefly hitting a four-year intraday high following an upbeat earnings announcement on Tuesday.
The company said March-April operating profit rose 8.4% from a year earlier. But it maintained its annual outlook, which some market players said have led to minor disappointment.
Boutique shopping mall chain Parco Co Ltd rose by the daily limit to a 3-1/2 year high after sources told Reuters that Japanese department store operator J. Front Retailing Co Ltd would announce a bid to nearly double its stake in the company.
Exporters have fallen out of favour recently as a stream of disappointingly soft data from the United States and China has worried investors.
Despite reporting robust US sales in June, Toyota Motor Corp fell 0.2%.
The soft data has also prompted hopes for further stimulus from central banks to jumpstart flagging global growth.
The European Central Bank is expected to drop its main refinancing rate by 25 basis points to a historic low of 0.75% at a meeting on Thursday, while some investors are hoping the Bank of Japan will expand its easing programme at a policy meeting concluding July 12.