The Nikkei average hit a seven-month closing high on Friday as a weaker yen, driven by persistent expectations the Bank of Japan will act more boldly under a likely new government after a December 16 election, lifted the shares of exporters.
The Nikkei has surged 9% while the yen has weakened over the past two weeks after Shinzo Abe, leader of the main opposition party, called for the central bank to set an inflation target of 2% and embark on "unlimited easing" to pull the economy out of its decade-long deflation.
The rally produced a 5.8% rise in the benchmark Nikkei this month, its best monthly performance since February.
The Nikkei ended 0.5% higher to 9,446.01 on Friday after trading as high as 9,492.91, or 1% up, earlier in the session.
According to Reuters data, the most traded December Nikkei index options were a call with a strike price of 9,750, 3.2% above Friday's close, followed by another call at 10,000 and a put at 9,250
But some players were less upbeat on the market, saying domestic investors could turn into sellers when the Nikkei nears the 9,500-mark.
"Their positions are like this ... short on the yen and long on the Nikkei," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Securities. "Buying (in the equities market) is mainly by foreign hedge funds such as commodity trading advisors who are chasing the Nikkei 225 futures higher."
"Domestic players are becoming sellers because they take a cold look at their political climate," he said.
Another Tokyo-based analyst said: "It does feel like people aren't that committed to take a big punt at the end of the year."
Exporters in demand included Canon Inc, Nikon Corp, semiconductor equipment maker Tokyo Electron Ltd and Nissan Motor Co, up between 0.9 and 4.5%, as the yen was traded at 82.40 to the dollar, near a 7-1/2-month low of 82.84 yen reached on November 22.
Hitachi Ltd climbed 4.2% and Mitsubishi Heavy Industries Ltd advanced 3% after they said they would combine their thermal power businesses to better compete against bigger overseas rivals Siemens AG and General Electric Co.
Adding to the upbeat sentiment on Friday, Japan's industrial output unexpectedly rose in October in a sign the world's third-largest economy may have seen the worst of the effects of weak global trade and a diplomatic row with China.
The broader Topix index gained 0.3% to 781.46, with 2.39 billion shares changing hands, up from Thursday's 1.81 billion and last week's average of 1.95 billion.
In terms of valuations, Japanese equities carry a 12-month forward price-to-earnings ratio of 12, slightly cheaper than U.S. S&P 500's 12.5 but more expensive than the pan-European STOXX Europe 600's 11, data from Thomson Reuters Datastream showed.
