Japan's Nikkei share average rebounded on Monday as a euro zone decision to pump up to $125 billion into Spain's struggling banks eased investors' fears about contagion from the country's financial sector.
Investors picked up stocks which were shot down during Friday's sell-off, with Europe-focused exporters such as TDK Corp enjoying some of the biggest gains as the yen eased further against the euro.
"The main problem was Spain, and now that a forward-looking strategy to tackle that problem has emerged, the mist has lifted somewhat," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.
"But I don't think this will turn into a full-blown rally over the coming days with the Greek election looming."
The Nikkei rose 2 per cent to 8,624.90 , recovering from a 2.1 fall on Friday to step clear of its 14-day moving day average at around 8,535.84. The benchmark index was supported by Canon Inc, the most traded stock on the main board, which climbed 3.5 per cent.
Sharp Corp jumped 8.2 per cent after the company said it would sell more shares to Taiwan's Hon Hai Precision Industries and would consider listing the subsidiary that runs its main liquid crystal display factory.
Exporters dependent on Europe were granted a breather as the yen weakened against the euro after euro zone finance ministers agreed to lend Spain up to 100 billion euros to support its struggling banks.
TDK Corp rose 4.8 per cent, while Mazda Motor Corp, the Japanese automaker with the most exposure to Europe, gained 3 percent.
All sectors were into positive territory after suffering heavy losses on Friday, when the Nikkei fell 2.1 per cent.
The benchmark index hit a six-month low on June 4, while the broader Topix index slid to a 28-year low.
"Investors perceived last week's lows as the bottom for the market, so I don't think it can go much lower," said Takashi Hiroki, chief strategist at Monex Inc. "That's not to say the market is strong, of course. It's still very fragile."
The Topix gained 1.7 per cent on Monday to 730.07 in the thinnest volume for two weeks, with 1.45 billion shares changing hands.
SUN IN SPAIN, RAIN ELSEWHERE?
"The focus is now on the upside," said Sakagami of SMBC Nikko Securities. "Valuations are so cheap that a return to normal levels would mean an upside of 30 percent on the Topix."
The 12-month forward price-to-book ratio of the Topix is very low at 0.8, in contrast to 1.8 for the S&P 500 index and 1.2 for the Euro STOXX 50.
However, market participants concede that the current economic headwinds may make it difficult for Japanese stock prices to return to "normal" levels.
A June 17 election in Greece that could result in the country exiting the euro has dampened sentiment for weeks, while hopes for further easing from the Bank of Japan and Federal Reserve after upcoming policy meetings could be crushed if both central banks decide to hold fire.
"The BOJ have little choice other than to ease," said Sakagami of SMBC Nikko Securities. "If they don't and the Fed does, then the yen will strengthen again, and they'll face enormous pressure from politicians to do it."
In addition to a worsening euro zone crisis and signs of slowing growth in the United States and China, domestic issues could add to investor concerns in the coming weeks.
"People will begin to focus on the consumption tax hike issue as the government is due to decide whether to raise it or not soon," said Hiroyuki Mutsuro, head of execution support office at Mizuho Securities.
Prime Minister Noda has plans to double the consumption tax from 5 percent to 10 percent by 2012 to fund swelling social security costs.
"They have to raise it, but it could make the yen stronger, which will be bad for stocks."
