TOKYO Japan's Nikkei share average topped 8,700 for the first time in a month on Monday after Greece's pro-bailout parties won a parliamentary majority at weekend elections, easing fears of a messy euro zone exit.
Investors unwound cautious bets and covered their shorts on economically sensitive sectors such as financials and mining firms while defensive utilities fell, but trading remained light as concerns about the euro zone debt crisis persisted.
"Unfortunately this rally will be a brief one spurred on by short-covering, but nothing more," said Norihiro Fujito, general manager of senior investment strategist at Mitsubishi UFJ Morgan Stanley.
"There's more to the euro zone crisis than just Greece and if the victorious party don't improve Greeks' lives their support will switch to (anti-bailout party) SYRIZA and we'll be back to square one."
The Nikkei rose 1.8 percent to 8,721.02, its highest closing level since May 22 and breaching above its 25-day moving average at 8,601.
But it is still down 13.5 percent so far this quarter after rallying more than 19 percent in January-March when it logged its best first-quarter performance in 24 years.
Financials were in demand as Greece's immediate fate became clearer. Nomura Holdings (8604.T), Japan's top investment bank, rose 2.6 percent and Daiwa Securities Group (8601.T) added 2.7 percent, while Mitsubishi UFJ Financial Group (8306.T) gained 2 percent and Mizuho Financial Group (8411.T) gained 3.3 percent.
Sharp Corp jumped 5.6 percent after Deutsche Bank upgraded its rating to "hold" from "sell", saying the stock no longer looked expensive, while the shift of its display unit to an unconsolidated affiliate should curb losses.
The battered electronics sector also enjoyed a bounce, with Sony Corp (6758.T) and Panasonic Corp (6752.T) up 4.2 and 3.5 percent respectively.
Naomi Fink, Japan equity strategist at Jefferies, said incentives for renewable energy could also benefit select names in the electronics sector, such as Kyocera Corp (6971.T) and Murata Manufacturing Co Ltd 6981.OS.
The Nikkei volatility index shed 17.5 percent to a one-month low. The lower the volatility index, the higher the risk appetite.
Domestically driven stocks that found favour in last week's risk-averse climate underperformed the broader market, with Fast Retailing Co Ltd (9983.T) up 0.7 percent and Softbank Corp (9984.T) down 0.3 percent. The defensive utility sector IEPNG.T also fell into the red, down 0.5 percent.
"It's a temporary rally but we're seeing broad gains because the global situation has changed now that the prospect of a "Drachmageddon' has disappeared," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
The broader Topix rose 1.7 percent to 738.81, also hitting a one-month closing high. Trading on the main board were thin with 1.48 billion shares changing hands, or 74 percent of its daily average for the past 90 days.
MORE POLICY RESPONSE?
Fears of an imminent euro zone exit have been soothed by the election result, but concerns remain about the health of Spanish banks, which were granted a 100 billion euro bailout last week, as well as the euro zone's fiscal health in general.
Investors are hoping for a coordinated response to the euro zone crisis from the Group of 20 leading economies, which starts a two-day meeting later on Monday, and many expect further easing from the U.S. Federal Reserve after its policy meeting concluding on Wednesday.
Morgan Stanley MUFG on Friday lifted its year-end target for the Topix to 880, a 19.1 percent upside from Monday's close, on expectations of further monetary easing from central banks.
"Although we had hit post-bubble lows of 695.51 on June 4 from the perceived additional risks put into the euro zone, Morgan Stanley's house-view is for further easing under our base case, with a large number of central banks globally to deliver more easing in the next few quarters," it said in a report.
"As we believe our base case P/E multiple of 15x make sense in a base case easing scenario, we stand by our preference for Japanese equities over bonds."
But SMBC Friend Securities' Nakanishi said there was a lower chance that the Fed would ease since the situation in Greece had been defused.
(Additional reporting by Sophie Knight; Editing by Richard Pullin)