tokyo 08 07, 2012, 08:30 IST
The Nikkei share average rose on Tuesday, extending the previous session's sharp rally, driven by strength in steelmakers after U.S. peer AK Steel announced price increases in a sign of an improving business.
But gains were capped by weakness in companies such as Tokai Carbon Co Ltd <5301.T> and Hoya Corp <7741.T> that reported weak quarterly earnings, while investors remain cautious ahead of this week's Bank of Japan policy meeting and economic data from China, Japan's largest export market.
The Nikkei rose 0.6 percent to 8,778.73, breaking above i ts 25-day moving average at 8,733.04 and setting its sight on the 75-day moving average at 8,816.35. The benchmark rallied 2 percent on Monday.
"Everyone that I speak to is cashed-up as they can be," said a Tokyo-based analyst who declined to be identified.
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"There's a lack of confidence still with low volumes. Stocks are getting beaten up even more on the back of that. If anything, it feels as if the market is even more concentrated in the bigger and better names."
Steelmakers gained, with JFE Holdings <5411.T> up 3.7 percent, Nippon Steel Corp <5401.T> adding 3.9 percent and Sumitomo Metal Industries Ltd <5405.T> tacking on 4.5 percent.
Seafood company Maruha Nichiro Holdings <1334.T> surged as much as 13.2 percent to a three-month high after it said it would spend up to 2 billion yen to buy back up to 3.3 percent of its shares. The stock was last up 11.4 percent.
The broader Topix put on 0.6 percent to 740.35. Trading volume on the Topix was relatively light, at 39 percent of its full daily average for the past 90 days.
The index is still down 5.3 percent from a two-month high hit on July 4 on concerns over a deepening 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, data from Thomson Reuters Datastream showed.
"Retail investors are still buying on the dips but the amount is decreasing ... because they have a lot of losses under the trades that they have been making in the past few weeks," said Jun Yunoki, equity analyst at Nomura Securities.
Tokai Carbon slumped 17.8 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.
Investors also punished Hoya, which sagged 3.8 percent after the optical glasses company posted weak quarterly results.
Japanese companies have so far 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 missing expectations in the previous quarterly earnings season.
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 its readiness to ease again if the economy's recovery comes under threat.