Japan's Nikkei share average rose on Wednesday as investors bet on a new round of stimulus from the U.S. Federal Reserve to pep up a flagging U.S. recovery and offset the impact of a deepening euro zone debt crisis.
The Nikkei climbed 1.1 percent to 8,752.31, its highest closing level since May 17, as risk sentiment picked up and spurred gains for insurance and real estate companies.
"Market participants are extremely sensitive, and in a heightened stage of anticipation. The FOMC result tonight seems to be well telegraphed and it does seem that there will be an extension of 'Operation Twist'," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo, referring to the Fed's bond-buying scheme that is set to finish at end-June.
The Fed is due to release a statement at 1630 GMT, following a two-day meeting.
Financials and real estate companies, which benefit the most from any reflation trade, were in demand on Wednesday, with Nomura Holdings up 4 percent, Daiwa Securities Group gaining 4.5 percent and Sumitomo Realty & Development adding 4.8 percent.
Lender Sumitomo Mitsui Financial Group rose 2.3 percent after Bank of America Merrill Lynch chose it as its top pick and said in a report that "Japanese banks fundamentally offer good value and should be less affected" by global concerns.
Mitsubishi Heavy Industries Ltd shed 3 percent after a U.S. court said the industrial equipment maker was responsible for a radioactive leak at a California nuclear power plant, as it did not properly test pipes before installation.
Daio Paper Corp rose 7.2 percent after a report in the Nikkei business daily that Hokuetsu Kishu Paper Co Ltd plans to acquire a 20 percent stake worth around 10 billion yen in the company. Daio Paper was hit by a scandal last year after a former chairman was found to have used more than 10 billion yen from subsidiaries for personal use.
Automakers were in favour, with Toyota Motor Corp rising 1.2 percent on a report that it will cut production capacity in Japan by 10 percent. Honda Motor Co tracked the market with a gain of 1.1 percent after Nomura upgraded it to "buy" from "neutral" and hiked its target price, citing a better-than-expected recovery of U.S. sales.
EXPORT WORRY
Yet some analysts feared automakers and other major exporters could be under pressure if the Fed springs a surprise by announcing further purchases of new securities dubbed "QE3", a third round of quantitative easing.
"Investors are cheering for more stimulus but it would probably weaken the dollar, which would be bad for Japanese equities," said Yoshihiko Tabei, general manager of capital markets research at Kazaka Securities. "A lot of companies based their last guidance on the dollar holding at 80 yen and the euro up at 105 yen, which now looks unrealistic."
A persistently high yen could leave many export-dependent companies disappointing with their second-quarter sales, which some market players think will decrease the chances of the Nikkei rising above 9,000 in the near-term.
However, Nomura Securities said in a note that it expected "growing momentum for a rally" and saw a rebound range of 9,000 to 9,500, or a 38.2-68.8 percent retracement of the index's fall from its one-year high on March 27 to a six-month low on June 4.
The benchmark index is currently down 13.2 percent, pushed down by concerns about an intractable euro zone debt crisis and worries about slowing growth in the U.S. and China, after rallying more than 19 percent in January-March.
"If the situation stays like this then the focus will definitely shift away from cyclicals to companies with a great proportion of domestic sales, such as the communications sector," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
The broader Topix climbed 1.7 percent to 747.34, its highest close since May 15. However, volume remained relatively thin, at 77 percent of its 90-day average.
