The Nikkei share average rose on Tuesday, extending the previous session's sharp rally and in step with global markets' overnight gains as investors continued to adjust positions in the last throes of Japan's earnings season.
Steelmakers provided ballast for the market after U.S. peer AK Steel announced price increases, signalling business had improved and helping JFE Holdings <5411.T>, N ippon Steel Corp <5401.T> an d Sumitomo Metal Industries Ltd <5405.T> rise between 4.9 and 5.4 percent.
However, the market's gains were capped by declines at companies such as Tokai Carbon Co Ltd <5301.T> and Hoya Corp <7741.T>, which reported weak quarterly earnings. Many investors remained cautious ahead of this week's Bank of Japan policy meeting and economic data from China, Japan's largest export market.
The Nikkei rose 0.9 percent to 8,803.31, breaking above its 25-day moving average at 9,841.83 and edging closer to the 75-day moving average at 8,816.68. The benchmark rallied 2 percent on Monday, its biggest gain for three months.
Investors, and particularly hedge funds, are also betting on where the market will end up when a slew of options are settled on Friday in a monthly event on the Japanese market known as an "options SQ", or "special quotation".
"The market looks rather firm today but the direction will ultimately be decided by which side of 8,750 the Nikkei ends on after the options SQ," said Kenichi Hirano, operating officer of Tachibana Securities.
"If it ends up above then it will be a bullish sign, but if it falls short then it will probably keep falling," he said.
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A trading glitch in the Tokyo Stock Exchange's futures market in the morning session indirectly depressed volumes, although traders said the effect was mild as trading was already thin, while cash sales were unaffected.
"Volume is very low, which really amplifies movements of individual stocks, making it quite a difficult market," said Masato Futoi, head of cash equity trading at Tokai Tokyo Securities. "Sentiment isn't all that bad but there isn't anything terribly positive to spur trading. The focus is on individual stocks, not the market as a whole."
Tokai Carbon slumped 18.1 percent on Tuesday to an eight-year low after the rubber company cut its full-year earnings guidance, citing a slowdown in Europe and China, while investors pushed optical glasses company Hoya down 3.7 percent.
Horiba Ltd <6857.T> also suffered after cutting its operating profit forecast for the current year, shedding 18.2 percent to an eight-month low and reaching its one-day limit-down.
So far, Japanese companies have reported weaker-than-expected quarterly earnings, with 54 percent of the 127 Nikkei companies that have announced results missing market expectations, data from Thomson Reuters StarMine showed.
That compared with 40 percent falling short of predictions in the previous quarterly earnings season.
Seafood company Maruha Nichiro Holdings <1334.T> stood out, surging 13.2 percent to a three-month high after saying it would spend as much as 2 billion yen to buy back up to 3.3 percent of its shares. The stock closed up 8.8 percent.
The broader Topix put on 1.1 percent to 743.70. Trading volume on the Topix was relatively light, at 86 percent of its 90-day average.
The index is still down 4.5 percent from a two-month high hit on July 4 on concerns about the euro zone crisis and spluttering global growth. The correction took the Topix's 12-month forward price-to-earnings ratio to 10.7, a seven-week low, according to data from Thomson Reuters Datastream.
DON'T EXPECT CHINA TO GIVE A BOOST
The BOJ is expected to keep monetary policy steady at its two-day meeting this week, but may escalate its warnings over slowing global demand and renewed gains in the yen, signalling readiness to ease again if the economy's recovery comes under threat.
The other concern for investors is whether Chinese data due out on Thursday and Friday will top expectations or be the latest sign of a slowdown in the world's second largest economy.
While some analysts say disappointment at poor numbers could be countered by expectations of policy changes to prop up the market, others remain unconvinced.
"There's a lot of speculation that China is going to ease policy or introduce stimulus measures soon, but before the leadership change later this year they are only going to tweak minor things, like bank lending rates," said Hirano of Tachibana Securities. "That's why the Chinese economy is going to stay stuck for a while, which is bad for Japanese exporters."