TOKYO The Nikkei average rallied 2.2 percent on Friday, regaining the key 9,000-mark, as investors bet Japan's main opposition party will win next month's election and put more pressure on the central bank to stimulate the ailing economy.
The call by the Liberal Democratic Party's leader Shinzo Abe, a former prime minister, for the Bank of Japan to push interest rates to zero or below zero to spur lending has whipsawed the yen to a 6-1/2-month low against the dollar, sending shares in exporters sharply higher.
Exporters had been battered by worries about U.S. "fiscal cliff", the euro zone's debt crisis and slowing demand in China, and several, including Nissan Motor Co (7201.T), Canon Inc (7751.T), Nikon Corp and Mazda Motor Co, surged more than 5 percent.
The Nikkei climbed 194.44 points to a two-week closing high of 9,024.16, and logged its biggest one-day percentage rise in two months. The index has risen 3 percent this week, helped by a 4.2 percent jump in the past two days.
"Japanese shares have been underperforming their global peers, so investors may take this domestic trading cue as a chance to chase the market higher," said Kenji Shiomura, an analyst at Daiwa Securities.
The benchmark Nikkei is up 6.7 percent this year, trailing a 7.6 percent rise in the U.S. S&P 500 and an 8.6 percent gain in the pan-European STOXX Europe 600 .
In terms of valuation, Japanese equities carry a 12-month price-to-book ratio of 0.9, much cheaper than S&P 500's 1.9 and STOXX Europe 600's 1.4, data from Thomson Reuters Datastream showed.
The broader Topix climbed 1.9 percent to 751.34, with trading volume hitting an eight-month high.
Nomura Securities highlighted Nikon, Sumitomo Heavy Industries Ltd (6302.T), Daikin Industries Ltd (6367.T), electronic parts maker Nidec Corp 6594.OS, Shin-Etsu Chemical (4063.T), Suzuki Motor Corp (7269.T) and auto parts maker Denso Corp (6902.T) as among the firms that benefit the most from a softer yen.
Nicholas Smith, Japan strategist at CLSA, said his preferred plays were real estate companies Mitsubishi Estate Co Ltd and Mitsui Fudosan Co Ltd (8801.T), and brokerage Nomura Holdings (8604.T).
"Particularly since the global financial crisis, with capacity up the wazoo, that newly minted money is unlikely to go into capex. It is not impossible that some goes into consumption," Smith said in a report.
"But the lion's share is likely to take the path of least resistance straight up the middle into asset price inflation. Two obvious beneficiaries are real estate and construction."
Nomura advanced 5 percent, while Mitsubishi Estate and Mitsui Fudosan added 1.6 and 2.3 percent, respectively.
Investors demand for Nikkei call options, which essentially bet on the index to go higher, were brisk, outnumbering the demand for put options.
According to Reuters data, Friday's most-traded Nikkei index options were a call with a strike price of 9,500, a 5.3 percent upside from Friday's close, and a December maturity
The next most-traded was a December call at 9,250, followed by a December put at 8,500 and another call at 9,750.
Among the handful of losers on the Nikkei, brewer Kirin Holdings Co Ltd (2503.T) dropped 2.2 percent after a consortium led by Overseas Union Enterprise Ltd (OVES.SI) said Kirin will offer to buy Fraser and Neave Ltd's (FRNM.SI) food and beverage business for $2.2 billion if OUE's bid for F&N is successful.
(Additonal reporting by Ayai Tomisawa; Editing by Kim Coghill)