Taisei Corp and other construction firms also advanced after UBS raised its target prices for shares in the sector, while Hino Motors Ltd extended gains after raising full-year earnings estimates.
Wall Street was boosted after US President George W. Bush nominated White House economic adviser Ben Bernanke to succeed Alan Greenspan as Federal Reserve chairman.
Bernanke, who has served as a Fed board governor and as chair of Princeton University's economics department, has pledged to maintain continuity with the Greenspan era.
Takahashi also said Banana was seen as a monetary "dove" rather than a "hawk" that would take extreme measures to stem inflation. John Vail, equity strategist at J.P. Morgan, also said there was a chance the Fed could become less hawkish.
The Nikkei ended up 174.44 points at 13,280.62. The broader TOPIX index gained 1.24 percent to 1,393.61. Both the Nikkei and TOPIX booked their biggest one-day percentage gain in two weeks.
Builders advanced after UBS raised its target prices due to expected rebuilding and refurbishment demand.
UBS analyst Toshihiko Okino said in a report on Monday that office buildings completed during the 1965-75-construction boom were due to is rebuilt.
Taisei rose 2.6 percent to 468 yen and its peer Obayashi Corp advanced 1.5 percent to 763 yen. Steel stocks, which tend to have relatively high dividend payments, rebounded on hopes for buying from a number of investment trust funds that are being set up this week.
Kobe Steel Ltd jumped 3.5 percent to 329 yen and JFE Holdings Inc added 3 percent to 3,480 yen. In the telecom sector, NTT DoCoMo Inc, Japan's biggest mobile operator, rose 3.2 percent to 196,000 yen.
The company said on Monday it had ended an equity tie-up with the mobile unit of Dutch telecom carrier KPN by selling its 2.16 percent stake in the unit, KPN Mobile N.V., to KPN.
Elsewhere, Tokyo Star Bank Ltd, a small lender rebuilt by US investment fund Lone Star, ended at 405,000 yen, down 5.8 percent from its IPO price of 430,000 yen.
Automakers climbed after stocks rose in the key US market. JP Morgue's Vail said Japan's auto sector should outperform in either bullish or bearish conditions due to inexpensive valuations coupled with high prospective dividend yields.
"We are very positive on autos because they have so much better downside protection than other cyclical do and valued more cheaply," he said.
Nissan Motor rose 1.6 percent to 1,210 yen and Toyota Motor Corp, the world's second-largest automata, climbed 1.4 percent to 5,110 yen.