Economists say it is only a matter of time before Beijing tightens monetary policy further, though the initial reaction in the stock market was limited. "What the market is watching most closely now is China's policy stance. It's not tightening yet, but the market tends to sensitively react to any signs of tightening policy at an early stage. We're still in that very precarious place," said Masaru Hamasaki, senior strategist at Toyota Asset Management. "But once we pass this phase, investors will likely shift their focus to the strength in the economy and expectations for solid earnings."
The benchmark Nikkei gained 130.89 points to 10,868.41, reversing an early dip, with support solid around 10,600, just above the Nikkei's 25-day moving average. The broader Topix also climbed 1.2 percent to 956.03. The dollar rose 0.4 percent to around 91.64 yen, while the euro was up 0.3 percent at 129.10 yen. Investors fret about a stronger yen as it curbs exporters' profits when they are repatriated.
"The yen's stabilising moves are supporting the market, but if the yen becomes stronger again, the market could easily lose ground as concerns about further Chinese tightening steps remain," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
On Wednesday, news that China's central bank has ordered at least two lenders to increase their reserves sparked worries that China may be moving towards tightening policy and slower growth, sending the Tokyo market lower. TDK, which makes parts for hard disk drives, jumped 4.8 percent to 6,120 yen after Citigroup raised its rating on the company to "buy/high risk", partly citing strong demand for personal computers and low hard drive inventory levels.
Chip-tester maker Advantest Corp climbed 3.6 percent to 2,597 yen and Sony Corp gained 4.1 percent to 3,185 yen. Nikon, which makes steppers, rose 2.7 percent to 2,045 yen. Other blue chip exporters also gained to help push up the overall market. Toyota Motor Corp rose 2.1 percent to 4,190 yen and Honda Motor Co advanced 1.7 percent to 3,310 yen. Shares of Shin-Etsu Chemical Co Ltd rose 1 percent to 5,260 yen.
Shares of Pioneer slid 3.9 percent to 296 yen after Jiji news agency said the struggling electronics maker is considering a public offering of 20 billion to 30 billion yen ($218-328 million), and has decided to give up on its application for public funds. About 2.6 billion shares traded hands on the Tokyo exchange's first section, off seven-month highs above 3 billion shares hit last week. Advancing stocks outnumbered declining ones by 2 to 1.