Japan's Nikkei average rose on Wednesday, as a halt in the yen's gains prompted investors to buy shares of exporters such as Toyota Motor Corp and Honda Motor Co who would gain from a more competitive currency.
The Nikkei has rallied nearly 22% over the past two months, led by exporters as the yen weakened after new Prime Minister Shinzo Abe called on the central bank to adopt an aggressive monetary policy to energise the ailing economy, including setting an inflation target of 2%.
Analysts said that investor risk appetite was intact amid hopes for aggressive easing next week.
"We saw some profit-taking earlier as the yen was bouncing a bit, but that's within the market's expectations as it has been overheated," said Toshihiko Matsuno, a senior strategist at SMBC Friend Securities.
The Nikkei gained 0.7% to 10,578.57, breaching above its five-day moving average at 10,553.79, after trading as low as 10,398.61 earlier in the session.
Wednesday's gain took the Nikkei's 14-day relative strength index to 74.4, above the 70-mark which is considered overbought and often signals a near-term pull back.
The Bank of Japan will consider easing monetary policy again this month as it eyes doubling its inflation target, sources told Reuters, as weakness in the economy threatens to delay the country in getting out of deflation.
Any easing will likely take the form of another increase in the BOJ's 101 trillion yen asset buying and lending programme, mostly for purchases of government bonds and treasury discount bills, sources familiar with its thinking say.
Exporters reversing early losses included Toyota Motor Corp, Honda Motor Co, Nikon Corp and Daikin Industries, up between 0.6 and 1.6%.
But Canon Inc and Panasonic Corp remained weak, down 1.2 and 0.2%, respectively.
The yen was down 0.5% at 87.43 to the dollar on Wednesday after rising 0.9% in the previous session, its second day of gains.
Retail investors chase market up
Amid ongoing buying by foreign investors, traders noted that retail investors also chased the market higher by buying small-to-mid sized companies in sectors such as consumer finances on hopes that the business-friendly LDP-led government will review lending rules and loosen financial regulations.
Acom Co rose 0.8%, while Aiful Corp added 0.4%.
Construction shares also attracted buying, with Kajima Corp rising 1.8% and Taisei Corp climbing 2.1% on expectations that the new government will increase spending on public works.
The rally in Japanese equities has pushed up their valuations, with the 12-month forward price-to-earnings ratio rising to 13, ahead of the US S&P 500's 12.9 and the pan-European STOXX Europe 600's 11.4, according to Thomson Reuters Datastream.
Japan's broader Topix added 0.8% to 879.05 in active trade, with 3.67 billion shares changing hands.
Other notable gainers included Seven & I Holdings Co, which advanced 1.8% after its quarterly operating profit rose 4.8% as higher profits from its core 7-Eleven stores were supported by stronger income figures at other retail formats.
