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TOKYO, Dec 27 AFP

December 27 2012, 6:37PM

Tokyo's benchmark Nikkei 225 index has closed at its highest level since the quake-tsunami disaster in March last year, a day after Japan's new conservative government took power.

The Nikkei on Thursday added 0.91 per cent, or 92.62 points, to 10,322.98 by the close, finishing above 10,254.43, its level on March 11, 2011 when a massive temblor hit Japan, sparking a tsunami and subsequent nuclear crisis.

The broader Topix index of all first-section shares was up 0.75 per cent, or 6.38 points, at 854.09.

"It's all a yen-driven story, with foreign long interest remaining nominally strong," Tachibana Securities market analyst Kenichi Hirano told Dow Jones Newswires.

"The Nikkei hitting a fresh 2012 high set off alarm bells, meaning certain global funds can't afford to not buy the market.

"All other things being equal, as long as the yen keeps weakening, stocks should continue to benefit from brighter earnings expectations, short-covering, and increasing overseas investor interest," he added.

The dollar rose to its highest level in more than two years against the yen in forex trade as Shinzo Abe was sworn in as prime minister.

Abe - whose Liberal Democratic Party won a landslide election victory this month - has repeatedly said he would pressure the Bank of Japan for more easing measures, comments that have helped bring down the value of the yen.

A weaker yen helps Japanese exporters by making their products more competitive overseas.

"Some say the market is now overbought, but the trend is your friend, and few are willing to risk going short at the moment," said an equity trading director at a foreign brokerage.

"Japan is now right in the middle of the radar for foreign portfolio managers."

Toyota shares jumped 2.61 per cent to Y3,930 after the carmaker said it had agreed to pay about $US1.1 billion ($A1.07 billion) to settle a class action lawsuit launched by US vehicle owners affected by a series of mass recalls.

Honda was up 1.63 per cent at Y3,110, Fujitsu gained 1.11 per cent at Y363, investment banking giant Nomura Holdings rose 4.24 per cent to Y491 while Mizuho Financial Group was up 1.31 per cent at Y154.

US stocks fell on Wednesday on uncertainty about whether a deal to avert the fiscal cliff of tax hikes and spending cuts would be reached by the year-end deadline. The Dow Jones Industrial Average slipped 0.19 per cent to 13,114.59.

On currency markets, the dollar bought Y85.75 on Thursday afternoon in Tokyo, touching its highest levels since September 2010.

The euro fetched Y113.57 and $US1.3242 compared with Y113.19 and $US1.3230.