Japan's Nikkei average hit a three-month closing high on Thursday, reversing earlier losses as investors picked up exporters hurt by a firmer yen after the Fed signalled it is likely to launch another round of stimulus.
The Nikkei advanced 0.5 percent to 9,178.12, breaking above its five-day moving average at 9,160.09 and its 26-week moving average at 9,150.31. The benchmark lost as much as 0.8 percent to 9,062.54 earlier in the session.
Gainers included industrial robot maker and benchmark heavyweight Fanuc Corp, which reversed early losses to trade up 0.4 percent.
Automakers were also off their lows on the back of bargain hunting. Toyota Motor Corp, Honda Motor Co and Nissan Motor Co closed down between 0.3 and 0.6 percent.
"A lot of stuff that opened lower has been bought back up. The autos are having a bit of a rally ... some of these things that you normally consider to be oversold in the face of what's potentially QE3 coming down the pipe," a senior trader at a foreign brokerage said.
Exporters came under pressure earlier after minutes from the U.S. Federal Reserve's latest meeting suggested it is likely to launch another round of monetary stimulus, dubbed QE3, "fairly soon" unless the economy improves considerably.
The minutes weighed on the dollar, which fell as much as 1.3 percent to hit a one-week low against the yen at 78.273 on Wednesday. The dollar was last traded at 78.54 y e n.
Low trading volume also helped exaggerate market volatility, with 1.39 billion shares changing hands on the broader Topix index, up from Wednesday's 1.23 billion but down from last week's average of 1.52 billion.
The Topix was up 0.2 percent at 764.59.
Sharp in focus
Sharp Corp gained 1.1 percent and was the second-most traded stock on the main board by turnover after Japanese media said the embattled TV maker's main creditors, Mizuho Corporate Bank and Mitsubishi UFJ Financial Group , are considering extending about 200 billion yen in loans.
Short selling in Sharp remained high, with 92.05 percent of its stock that is available to be borrowed out on loan as of Aug 21, down from a high of 92.21 percent on Aug 17, according to data provider Markit.
Other gainers included Kao Corp, which rose 3.4 percent to its highest close since April 2010 after JPMorgan upgraded its rating on the home products and personal-care maker to 'overweight' from 'neutral' and lifted its price target.
Social gaming firm DeNA Co Ltd climbed 5.1 percent after Deutsche Bank lifted its price target.
Casting further doubt on the global growth outlook, China's factory activity in August shrank at its fastest pace in nine months as new export orders slumped and inventories rose, a signal that a persistent slowdown in economic growth has extended deeper into the third quarter.
Yasuo Sakuma, portfolio manager at Bayview Asset Management, said he expected trading in Japanese equities would be volatile in September ahead of the Fed's next meeting and fresh developments in Europe after policymakers return from holidays.
With this in mind, he has been gradually cutting his long positions, especially those in the tech and raw materials sectors, and plans to continue to lift his cash levels.
"Investors are relatively optimistic on the economy and expectations of stimulus from China and other markets but I can't find any catalyst to bid up the prices beyond current levels," he said.
Mounting expectations that the European Central Bank will soon launch a bond-buying programme to bring down borrowing costs for highly-indebted countries like Spain and Italy have helped the Nikkei rebound 10 percent since it hit a seven-week low on July 25. The benchmark is up 8.5 percent so far this year.
Helped by the recent upbeat sentiment, foreign investors turned net buyers of Japanese equities last week after seven weeks of net selling, capital flows data from Japan's Ministry of Finance showed.
