The Nikkei average climbed to a two-month high on Wednesday, with exporters gaining after the yen hit a seven-month low against the dollar on expectations that a new government will aggressively push the Bank of Japan to expand monetary stimulus.
Among exporters, the transport equipment sector was a notable gainer as foreigners bought carmakers such as Toyota Motor Corp and Honda Motor Co, which advanced 2.2% and 3.2% respectively.
Shinzo Abe, leader of the main opposition Liberal Democratic Party (LDP), has called for more extreme measures from the central bank, including setting a 3% inflation target to pull the export-reliant economy out of deflation.
His comments ahead of a December 16 national election have whipsawed the yen, which hit a seven-month low of 81.975 yen to the dollar on Wednesday. A softer Japanese currency inflates exporters' overseas earnings when repatriated and increases their sales competitiveness.
The Nikkei climbed 0.9% to end at a two-month high of 9,222.52, with a resistance level seen at a September high of 9,288. The broader Topix advanced 0.7% to 767.01.
Analysts said that sector-rotation may be seen during the next few days amid rapid rises in the Nikkei as some investors want to reshuffle their portfolios while securing profits on certain sectors.
"Some investors are alarmed by the market's fast-paced rises, and profit-taking is already seen in non-exporter sectors," said Yoshiyuki Kondo, an analyst at Daiwa Securities, adding that a further correction of about 200 points is possible in the Nikkei as the index has added about 500 points in the past week.
The property sector was heavily hit, with the Topix real estate index falling 1.6% to post the biggest drop on the board. Mitsui Fudosan dropped 2.3% to 1,737 yen and Mitsubishi Estate shed 1.4% to 1,602 yen.
"The sector had been up on a recovery in building vacancy rates and hopes for monetary easing, but it has become a target of profit-taking because it is little-affected by daily dollar-yen moves," Kondo said.
The real estate sector has added 5.7% over the past week, and gained 47% this year.
Toyota, Softbank in demand
Toyota was the second-most traded stock on the main board by turnover, with Softbank Corp <9984.T> the most traded. Honda and Canon Inc were the fourth and fifth-most traded, respectively.
Index heavyweight Softbank rose 3.0% to 3,005 yen after J.P. Morgan raised its price target on the mobile operator by 8.6% to 3,800 yen.
"The Japanese stock market is completely dependent on the Japanese yen...so it's very simple. Maybe foreign investors will rush into the Japanese stock market," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
"If you look at the trading volume last Friday and the last couple of days, not only short-covering but also the long-only, new money is entering the Japanese stock market."
Sakuma said he was tilting his portfolio towards exporters, such as auto parts makers, and camera and electronic device makers and cutting his exposure to domestically-focused companies such as retailers.
The benchmark Nikkei is up 9.1% this year, boosted by the 5.7% rally from November 14 to 19. Still, the Japanese index lags a 10.4% rise in the U.S. S&P 500 and a 10.2% gain in the pan-European STOXX Europe 600.