Japan's Nikkei share average rose to an 8-week high on Tuesday as investors bet major central banks will roll out more growth-boosting stimulus measures following unexpectedly poor US factory data.
Insurers posted the biggest gains, while All Nippon Airways Co Ltd brought up the rear, plummeting 13.8% on a report that it would raise up to 200 billion yen in a new share issue.
The Nikkei settled up 0.7% at 9,066.59 points, its highest close since it ended at around 9,181 on May 8, but it fell short of its Monday intraday high.
"The ISM figures in the US were worse than predicted, so there are increased expectations for QE3 (a third round of quantitative easing), as well as a rate cut from the European Central Bank," said Yoshihiro Ito, chief strategist at Okasan Online Securities.
U.S. manufacturing activity 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, undershooting the forecast of 52.0.
Similar surveys released on Monday also showed factory slowdowns in Europe, much of Asia and Brazil.
Data on Tuesday showing that China's services sector expanded at its fastest rate in three months in June lent some support, however, outweighing pessimism about a slowdown in the world's second largest economy after weekend data showed industrial activity at its lowest level in seven months.
"Asian markets were all given a boost when the China (services) PMI came in better than expected in the morning, but I think the Japanese market is getting overheated, so the upside is very heavy," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
The Nikkei's 14-day relative strength index hit 63.31, its highest in more than three months. An RSI of over 70 is considered overbought.
Renesas Electronics Corp shot up nearly 10%, the troubled chipmaker's latest volatile shift, after sources said the company would announce a sweeping restructuring plan later on Tuesday.
Kawasaki Kisen Kaisha Ltd, one of Japan's top three shippers, plummeted 14.7% as investors were unimpressed by the prospect of a 26% share dilution after the company said it would issue 200 million new shares on Monday.
An upgrade for Japan's three biggest banks from Daiwa Securities helped the sector put on 1.8%, with MUFG rising 3.2%.
Nikon Corp rose 3.1% after Nomura Securities noted exports of digital cameras had grown 19.5% in May compared to a year earlier, propelled by the popularity of high-end single-lens reflex cameras.
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.
The broader Topix index gained 1 percent to 777.11, its highest close since May 8.
TEASING OR EASING?
Hopes that the Bank of Japan will introduce further easing measures at its policy meeting concluding on July 12 have begun to dim on signs of an upturn in the domestic economy.
"Yesterday's tankan data showed manufacturing sentiment had improved, and markets both in Japan and overseas are looking a lot stronger than they were - why would the BOJ ease now?" said Nakanishi of SMBC Friend Securities.
A BOJ survey released on Monday showed sentiment among Japanese manufacturers improved in the April-June quarter for the first time in three quarters, while domestically-oriented shares have led the rebound from early June, when the Topix hit a 28-year low.
Although some investors will be disappointed if the BOJ does not at least expand its asset purchasing programme, others are putting their faith in the post-tsunami reconstruction drive to buoy the market.
"Concerns about overseas demand has turned the focus inward, and once rebuilding begins in earnest domestic demand is going to be more significant for the Nikkei than anything the BOJ can do," said Ito of Okasan Online Securities.
