The Japanese stock market surged the most since early March as weak US economic data spurred a global rally on hopes for slower Federal Reserve tightening.
Technology shares were the biggest boost to the Topix, which closed 3.2% higher, after a drop in US Treasury yields prompted investors to buy growth stocks. The benchmark has decreased its losses for the year to under 5%, compared with losses of more than 20% in key indexes of US and regional equity markets. The Nikkei 225 Index climbed 3%.
Overnight, the S&P 500 Index posted its biggest increase since July after a drop in the Institute for Supply Management's gauge of factory activity suggested that the US economy may be faltering.
Ikuo Mitsui, fund manager at Aizawa Securities Group, said it is too early to conclude that the US market's downtrend has really ended, and Japanese stocks are subject to global market turmoil. He added that there are a number of risk factors up ahead, including corporate results and the US midterm elections.
Japanese stocks have held up better this year as the weakening of the yen to a 24 year low lifted the profit outlook for the nation's exporters. Market moves have been spurred by a divergence in central bank policy, as the Fed pursues a hawkish path to tame inflation while the Bank of Japan maintains its easy-money stance.
Tuesday's rally in stocks came even as a gauge of inflation in Tokyo accelerated for a fourth consecutive month to rise at the fastest pace since 1992. Investors were unfazed by the launch of a North Korean missile earlier in the day.
Aizawa s Mitsui said Japanese stocks are going to gain more from the normalization of demand and increase in inbound travel. Other market watchers have praised the nation's relatively limited hit from inflation compared to other nations.
In an October 3 report, Andrew Sheets wrote that Morgan Stanley prefers Japan over the US among global equity markets, noting that Japan's equity-hedged yield has risen to 7.7%, the highest since 2001.
Some people are not bullish. Nomura Securities Co. sees a possible end to Japan's outperformance due to rising short positions among commodity-trading advisors.
After being close to neutral between early August and September, the CTAs shifted to expanding their aggregate net short position last week, according to Yoshitaka Suda, a strategist.
Americans are moving to cheaper places when home prices are not as high as in the United States.