The Nikkei rose 1.0 percent to 9,923.01 after advancing to as high as 9,967.24, with exporters leading the gains as the yen fell further. The gains took the index deeper into "overbought" territory, with its 14-day relative strength index at 80.64, well above 70 which is deemed overbought and often indicates a possible near-term correction.
About 3.42 billion shares changed hands on the main board, the highest level since March 9. That compares with last week's average daily volume of 2.29 billion shares. Traders said that a falling yen has attracted more buyers into the equity market on expectations that exporters will be reporting better earnings for the coming year. "The gains are not just from short-covering. New money is coming in, so although some correction may be seen, investors will probably keep buying as they don't want to miss out the opportunity to buy," said Hideyuki Okoshi, general manager at Chibagin Securities.
The Nikkei has risen 14.6 percent over the past five weeks, driven by yen weakness after Shinzo Abe, who was elected as the new prime minister on Sunday, called for the central bank to embark on "unlimited easing" and set an inflation target of 2 percent. The index is up 17.4 percent this year. Exporters were in demand on Tuesday, with Toyota Motor Corp, Honda Motor Co, Canon Inc and Hitachi Ltd up between 1.8 and 3.3 percent. Real estate firms, which stand to benefit from Abe's call for a reflationary policy, extended gains, with Mitsubishi Estate Co rising 1.2 percent and Mitsui Fudosan Co gaining 1.8 percent.
BNP Paribas said it expected the Nikkei to reach 11,000 in the first half of next year, 10.9 percent above Tuesday's closing price. But BNP Paribas said the real test for the new government would be in the second half of 2013. "Compiling the budget and replacing BoJ executives is one thing, but the question remains whether only economic stimulus measures and monetary easing will pull the Japanese economy out of deflation," it wrote in a note.
The broader Topix index gained 1.1 percent to 816.85. Kansai Electric Power Co shed 4.5 percent and Chubu Electric Power Co dropped 3.5 percent, but Tokyo Electric Power Co, which were battered by a meltdown in its Fukushima nuclear power plant after last year's earthquake, surged 17.3 percent.