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The Nikkei was up 145.99 points at 16,155.98 in mid-morning trade, after closing above 16,000 for the first time since December 2007 on Wednesday.
The government-sponsored investment plan, known as Nippon Individual Savings Account, will provide a five-year tax holiday on dividends and capital gains provided the money is invested in stocks, mutual funds or exchange traded funds.
"Today's the first day of the NISA trading start, so retail investors are quite active, or at least investment trusts will be quite active because they will be handling the money from retail investors," a senior trader at a European bank in Tokyo said.
The benchmark Nikkei is up 55% this year, on track for its best annual performance since 1972, driven by Japan's aggressive fiscal and monetary stimulus to boost growth in the world's third-largest economy.
Also underscoring the positive short-term outlook, Japanese companies' one-month earning momentum improved to 4.3% from -0.65 last month, data from Thomson Reuters I/B/E/S showed. That compared with -4.19% for the Standard & Poor's 500.
"A lot of the laggards will start to pick up, mainly autos and banks," the trader said.
"Those are among the most popular among retail investors for the long-term."
Toyota Motor Corp, the most traded stock on the main board, climbed 2.6%, while Mazda Motor Corp gained 3.5% and was the fourth most-traded.
Mazda Motor is the best performer in the Nikkei this year, up more than 190%.
Among banks, Mitsubisihi UFJ Financial Group, the sixth most-traded, gained 1.5% and Mizuho Financial Group advanced 1.9%.
The broader Topix index rose 1.2% to 1,272.98, with volume at 31% of full daily average for the past 90 trading days.
Construction-related companies were also in demand after Metropolitan Expressway Co Ltd said it would spend 630 billion yen to upgrade and refurbish highways in the Tokyo area ahead of the 2020 Summer Olympics.
Japan Bridge Corp jumped 13.2% and Obayashi Road Corp surged 7.7%, while Tokyu Construction Co Ltd, Toa Road Corp and P.S. Mitsubishi Construction Co Ltd were up between 5.3 and 7.1%.
