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The Japanese market has been hit by extreme volatility and big falls in recent weeks, with the index slumping to bear market territory due to concerns that the Fed may scale back its stimulus programme this year and a slowdown in the Chinese economy.
Disappointment over the government's recently unveiled growth strategy has also led some investors to trim back their high expectations for Prime Minister Shinzo Abe's growth-spurring policies.
But analysts said that Japanese shares seem to have hit the bottom as investors are expected to focus on likely improving companies' earnings this fiscal year.
"This should be a good bargain hunting period as Japanese companies' earnings are expected to recover this fiscal year," said Masayuki Kubota, senior fund manager at Daiwa SB Investments. "But even if the Nikkei rebounds now, we may not expect a steady rise... not until we confirm a recovery in earnings for the April-June period. Then, it will likely start rising steadily."
The Topix advanced 2.7% to 1,084.72.
But volume was light, with only 2.48 billion shares changing hands, the lowest since March 27 as investors remained cautious before the outcome of the Fed meeting starting Tuesday.
The benchmark Nikkei, which gained about 53% in the year to a 5-1/2-year high on May 23, has fallen 18.2% since then. But it is still up 5.4% since April 4, when the Bank of Japan unveiled sweeping stimulus measures aimed at breaking years of entrenched deflation and reviving growth.
On Monday, exporters rose, with Toyota Motor Corp gaining 2.0%, Honda Motor Co adding 1.5% and Sony Corp rising 1.4%.
Exporters' performances have been choppy in recent weeks as concerns over corporate earnings have emerged in response to growing volatility in the foreign exchange market which has seen the yen rebound from 4-1/2 year lows against the dollar. The wild swings in the Nikkei has been a key factor in the Japanese currency's bounce, as investors were forced to unwind short-yen positions.
But analysts said that unless the yen's strength sustains for a while longer, exporters' earnings will likely see growth, and therefore are likely to be bought again on rising profit expectations.
Nomura Securities said it sees prospects of a 30% rise in recurring profits for the year ending March even with the dollar trading at 90 yen.
Goldman Sachs was also upbeat on the market, maintaining its 12-month Nikkei target of 17,000, and said the pullback offered another opportunity to invest in reflation and consumption-related stocks.
"The yen is not the sole driver of Japan's profit recovery. Evidence is growing that consumption, production and housing investment are improving, so even if the dollar/yen averages 95 in FY2013-FY2014, EPS growth would still reach nearly 70%," the brokerage wrote in a note.
The dollar last traded at 94.95 yen.
Defensive stocks also attracted buyers, with Japan Tobacco gaining 5.0%, while Takeda Pharmaceutical Co Ltd rose 3.6%.
