Japan's Nikkei average jumped 1.5% on Friday to close above the key 9,000 level for the first time in seven weeks after European leaders agreed to take emergency action to bring down borrowing costs for Italy and Spain.
The Nikkei was down 10.7% this quarter, however, in its worst quarterly performance since last year's July-September period, though it is still up 6.5% so far this year.
"Obviously, you've got a quick snap reaction as shorts look to cover. Whether this deal (in Europe) actually changes anything is a big question. The problem is that longer-term measures are needed," a trader at a European brokerage said, referring to the euro zone agreement.
"One of the positives that you can take away is that the EU is actually doing something rather than sitting around and talking ... The problem is that the bailout fund hasn't got any bigger. It doesn't do anything to fix the underlying problem."
Euro zone leaders agreed that the region's rescue funds could be used to stabilise bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measure or economic reforms.
They also agreed that the bloc's future permanent bailout fund, the European Stability Mechanism, would be able to lend directly to recapitalise banks without increasing a country's budget deficit.
The Nikkei ended up 132.67 points at 9,006.78 after trading as high as 9,044.04, r eversing a small decline at the end of the morning session. Friday's gain took the index above its 200-day moving average at 8,942.99, but it remained below its 13-week moving average at 9,015.99.
U.S. stock index futures also bounced after the news, with S&P futures up 1.3% and Dow Jones futures up 1.1%.
Nomura Holdings, Japan's top investment bank, surged 3.9% on Friday. It was also boosted by report that Nomura will cut top managers' pay and is considering a temporary halt to some operations as it looks to resolve a costly insider trading scandal.
Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group were up 1.6 and 0.9% respectively.
Economy-sensitive exporters also enjoyed the bounce, with Toyota Motor Corp up 2.6% and Honda Motor Co adding 3.2%.
The broader Topix index climbed 1.5% to 770.08. Trading volume on the index hit a three-week high, with nearly 2 billion shares changing hands.
Shun Maruyama, chief Japan equity strategist at BNP Paribas in Tokyo, said short covering by investors would likely continue until mid-July.
"The near-term target is 9,300 to 9,400. After the short covering, we will have to look at fundamentals. These are not necessarily good," he said.
"The market will also enter earnings season. Profit guidance will not be so good."
Maruyama said the short selling ratio on Japanese stocks currently stood at 27%, down from more than 30% in May. Short covering tends to emerge when the ratio reaches 28 to 30%.
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