Japan's Nikkei share average rose on Tuesday, with financial issues leading gains, after surprise weakness in U.S. manufacturing data renewed speculation the U.S. Federal Reserve may step in to boost growth.
The Nikkei is within sight of a two-month closing high as investors expect the world's other central banks, including the European Central Bank and the Bank of Japan, may also ease policy this month.
The Nikkei rose 0.8 percent to 9,072.17 points, though it stopped short of testing Monday's intraday high of 9,103.79, with traders expecting substantial selling around 9,100 from investors.
U.S. manufacturing shrank in June for the first time in nearly three years as new orders plummeted, with the Institute for Supply Management index of national factory activity falling to 49.7 from 53.5 the month before, missing expectations of 52.0.
"As Europe seems to be stabilising for now, the focus is now on the state of the global economy but the ISM figures were terrible," said Kenichi Hirano, market analyst at Tachibana Securities.
"Still, what is equally surprising is the resilience of U.S. shares, which suggests investor sentiment remained strong because they link bad data to the chance of the Fed's QE (quantitative easing)," he added.
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With the European Central Bank widely expected to cut rates this week, some investors think riskier assets around the world are likely to be on firm footing despite fresh doubts about the euro zone's deal announced last week.
"Investors have been unwinding risk-off trading since early June and I think that will continue for now despite concerns over the global economy in the medium term," said Soichiro Monji, chief strategist at Daiwa SB Investments.
"Compared to one month ago, Europe has clearly made some progress ... After a likely ECB rate cut, investors may shift funds out of bunds to riskier assets," he added.
Many market players also speculate that the Japanese central bank could increase its asset purchases later this month.
Bank shares rose 2.1 percent, in part helped by Daiwa's upgrade of the country's top three banks. MUFG rose 3.2 percent while SMFG climbed 1.9 percent.
The strength of bank shares helped to lift the broader Topix index 1.2 percent to 778.51
Insurers climbed 1.8 percent while securities brokerage gained 1.4 percent.
Domestic-demand oriented shares have led the rebound the market's recovery from low in early June, when the Topix hit 28-year low.
Real estate firms gained 1.1 percent, extending their gains since June 4 low to 23.7 percent as the sector has been helped by speculation of rush demand ahead a likely increase in Japan's sales tax from 2014.
Japan's upper house is expected to pass Prime Minister Yoshihiko Noda's tax hike bills by September, in a major victory for Noda's efforts to cut Japan's huge budget deficit.
Some market players said Noda's success in raising the tax, something many of his predecessors had avoided to tackle, may be helping the Nikkei by lifting confidence in Japanese politics, which has been often seen as beset by a lack of leadership.
In the Tokyo Stock Exchange's main board, advancers beat decliners by 1302 to 239.
Among the decliners, Kawasaki Kisen, one of Japan's top three shippers, shed 12.7 percent to 137 yen after it said on Monday it would raise 28.6 billion yen by issuing up to 200 million new shares for capital spending, which will increase the total number of shares by 26 percent.