The Nikkei average clawed up 0.7 percent on Wednesday on window-dressing before the end of Japan's financial first half, but it pared earlier gains as the yen's strength revived and resistance held strong.
An additional boost came from a poor December outlook in the Bank of Japan's “tankan” survey of business sentiment, which some market players said could increase expectations the central bank will discuss easing monetary policy further at a meeting next week.
“The ‘tankan' was as expected, showing improvement in the short term and a gloomy outlook going forward. That only increased expectations for further easing by the Bank of Japan,” said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.
“But more gains in the market were limited because the yen persistently remained on the strong side.”
This week also marks the end of the April-September first half in Japan, and some analysts said window-dressing, or buying by fund managers of some of the quarter's better performers to improve their books, likely provided help.
Some analysts also cited buying of Japanese stocks by a US pension fund.
Still, market players said the longer-term outlook for the benchmark was poor, given the dollar's persistent weakness, and resistance around 9,660 – the upper level of the Nikkei's Ichimoku cloud on daily charts – would hold.
“Of course we have to see what happens when the BOJ meets next week, and over the next few weeks there's likely to be some support along the way from intervention,” said Hideyuki Ishiguro, a strategist at Okasan Securities.
“But the effectiveness of intervention is likely to wear off the more it's done, and the BOJ may not have so many options in terms of policy left. So the Nikkei could test the downside later this year.”
The benchmark Nikkei ended up 63.62 points at 9,559.38, while the broader Topix gained 0.5 percent to 846.97.
The Nikkei has gained about eight percent this month, its best monthly performance since March, helped by short-covering in exporter shares after intervention by Japanese authorities to weaken the yen two weeks ago.
But for the July-September quarter, the benchmark's rise is only about two percent, lagging other major stock markets. The MSCI index of Asia Pacific stocks outside Japan has gained about 17 percent during the same period.
The dollar fell as far as 83.62 yen on electronic trading platform EBS, its lowest since Japanese authorities intervened to weaken the yen on September 15.
The Federal Reserve is likely preparing a fresh round of quantitative easing steps to be announced at the end of its November 2-3 meeting, a report by influential hedge fund adviser Medley Global Advisors said on Tuesday, a market source told reporters.
These expectations grew in the wake of figures showing a decline in US consumer confidence to the lowest level since February, pushing the dollar below 84 yen.
The Nikkei's worst performer on Wednesday was Tokyo Electric Power Co (TEPCO), which tumbled 7.8 percent to 2,105 yen after media reported that Asia's largest utility was planning a share issue worth several billion dollars to fund investments.
Impact of yen strength
Japanese manufacturers' confidence improved for a sixth straight quarter, the BOJ's tankan survey showed, but they turned negative on the outlook in a sign of the stronger yen's threat to a fragile economic recovery.
Market players noted that big manufacturers surveyed in the tankan expect the dollar to average 89.66 yen in the financial year to next March, weaker than the forecast of 90.18 yen in the June survey but still sharply higher than the current level.
“Of course the currency rate, along with the generally sluggish global economy, raises quite a risk for half-year corporate earnings, which will start coming out next month,” said Hideyuki Ishiguro, a strategist at Okasan Securities.
“Should these be poor, the Nikkei might break below 9,000 sometime in November.”
Exporters rose, with Canon Inc rising 1.7 percent to 3,945 yen and Sony Corp up two percent at 2,645 yen.
Elpida Memory Inc surged 8.1 percent to 985 yen after the company said it would start mass production of advance DRAM chips in December, putting it ahead of bigger rival Samsung Electronics in technology.
Nintendo Co turned negative and fell 3.7 percent to 23,010 yen after the game maker said its launch of a 3D-capable version of its DS handheld game console would be in February in Japan and March in the US, missing the crucial holiday season.
Trade was moderate with some 1.75 billion shares changing hands on the Tokyo exchange's first section. Advancing stocks outnumbered declining ones by about five to one.