TOKYO Japan's Nikkei share average rose as much as 1.7 percent to a 23-month high on Friday, with exporters extending gains on a weaker yen after a newspaper reported Prime Minister Shinzo Abe as saying the central bank should consider making the pursuit of maximum employment a part of its mandate.
The Nikkei added 1.2 percent to 10,781.97 after rising as high as 1.7 percent to 10,830.43, the highest level since February 2011.
Exporters led the gains, with Toyota Motor Corp (7203.T) rising 1.6 percent, Honda Motor Co (7267.T) advancing 1.8 percent, and Nikon Corp (7731.T) adding 2.6 percent.
Abe was quoted by the Nikkei newspaper saying that Japan has lost competitiveness because of the strong currency and it was up to both the government and the BOJ to reverse the yen's gains for the sake of the economy.
"I want the BOJ to feel responsible for the underlying economy," Abe was quoted in the Nikkei newspaper. "I want the BOJ to keep maximising employment at the forefront of its thoughts."
Some analysts said that Abe had gone too far suggesting a restriction of the central bank's independence. But others said Abe's comments in the Nikkei reminded the market that the government can override rejections of bills by the upper house after winning an overwhelming majority of seats in the lower house election in December.
"Abe is seen seriously committed to making the economy better as he is becoming more detailed, and investors are feeling it is possible under his government," said Kyoya Okazawa, head of global equities at BNP Paribas. "While most macro funds have finished allocating Japan shares to their portfolios by the end of the year, we are getting inquiries from long-only funds which intend to pick up Japanese stocks on fundamentals."
Friday's gains took the Nikkei deep into "overbought" territory. Its 14-day relative strength index stood at 78.32, above the 70-mark which is deemed overbought and often indicates the market is ripe for a correction in the near term.
"Investors are already aware that the market is overheated. But even with such caution, they are ready to add more Japanese shares to their portfolios," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
But he added that buying could stall if the yen weakens very quickly, such as hitting 90 yen to the dollar on the day. The dollar last traded at 89.17 yen, its highest since June 2010.
"A weak yen is generally positive for Japanese exporters, but a steep drop from the current level may make them cautious," Miura said, adding that investors may also be wary of taking a large bet before a three-day weekend.
Markets will be closed on Monday in Japan for a public holiday.
The yen has been weakening since Abe called on the Bank of Japan in mid-November to adopt a bolder policy to revitalise the economy, including setting an inflation target of 2 percent. The Nikkei has since rallied nearly 25 percent.
Sharp Corp (6753.T) surged 9.6 percent to 321 yen, hitting a two-week high after the Asahi newspaper said Mizuho Corporate Bank and Bank of Tokyo-Mitsubishi UFJ are considering providing additional loans to the struggling TV maker.
Fast Retailing Co (9983.T) rose 3.4 percent after the operator of casual clothing chain Uniqlo raised its earnings guidance for the business year ending August, due to strong sales in its home market.
The broader Topix index gained 1.0 percent to 898.28.
(Editing by Eric Meijer)