Nikkei closes up 1 percent as Europe fears ease

A man looks at an electronic board displaying stock prices outside a brokerage in Tokyo November 10, 2011.

TOKYO (Reuters) - The Nikkei average gained more than 1 percent on Monday, helped by an easing of fears about Europe's debt crisis, but investors were reluctant to push the market higher ahead of an Italian debt auction later in the day.

Shares in scandal-hit Olympus Corp (7733.T) were overwhelmed by buy orders and remained untraded after a source familiar with the case said a fine could be imposed for false financial reports, a move that could help it avoid a delisting.

Newly appointed leaders Mario Monti in Italy and Lucas Papademos in Greece are racing to form governments and limit the damage from the debt crisis that has engulfed the region.

In focus will be Italy's five-year government bond auction due later on Monday, a critical test for the leadership of Monti, a former member of the European Commission.

"Just because there are new faces at the top in Greece and Italy doesn't mean their troubles have suddenly gone away," said Fumiyuki Nakanishi, a strategist at SMBC Friend Securities.

Banking shares outperformed ahead of earnings reports later in the day, following gains in U.S. financial shares on relief about the outcome of Italy's political crisis.

The Nikkei average .N225 closed up 1.1 percent at 8,603.70, after falling 3.3 percent last week. The broader Topix index .TOPX gained 0.9 percent to 735.85.

Volume was relatively thin with 1.41 billion shares changing hands on the main board, down from last week's average of 1.74 billion shares.

"Japan's market is like a bathtub with a very low level of water. There's no way to make ripples or waves in the market because of how low liquidity is. It's as if we're splashing around in low water," said Hajime Nakajima, a wholesale trader at Cosmo Securities.

The Nikkei's 25-day moving average of 8,754 is a key resistance point, strategists say, with the benchmark needing to rise above that level before investors become confident that stocks could resume an uptrend.

"The overall sentiment in the market is negative. There's the unsavory Olympus scandal and the whole corporate governance issue which weighs on the market," said Nakajima.

For now, strategists say the Nikkei will likely remain in a narrow range, with low expectations and less appetite for risk.

The market showed a muted reaction to Japan's July-September gross domestic product data released before the open, which showed the economy bouncing back from a recession led by strong exports and consumption. But the yen's strength and sluggish global growth cloud the outlook.

BANKS GAIN AHEAD OF EARNINGS, OLYMPUS UNTRADED

Ahead of earnings after the close on Monday, Mitsubishi UFJ Financial Group (8306.T) added 1.8 percent to 334 yen. Sumitomo Mitsui Financial Group (8316.T) gained 2.2 percent to 2,066 yen and Mizuho Financial Group (8411.T) rose 2 percent to 103 yen.

Nomura Holdings (8604.T) jumped 5.8 percent to 257 yen and was the second heaviest-traded issue by turnover, as Japan's top brokerage benefited from the market's rebound.

Olympus shares remained untraded on Monday due to a glut of buy orders and closed up by their daily limit at 540 yen, 17.4 percent above Friday's close.

The Tokyo Stock Exchange suspended trading of Nisshin Steel Co (5407.T) and Nippon Metal Industry Co (5479.T) after the Nikkei newspaper reported that the two companies were in talks to merge their operations to become Japan's No.2 stainless steel maker after Nippon Steel Corp (5401.T).

Both companies later denied the report.

Nisshin Steel rose 5.5 percent to 116 yen, and Nippon Metal Industry jumped 13 percent to 78 yen ahead of the suspension.

Tosoh Corp (4042.T), an integrated chemicals maker, fell 4.4 percent to 219 yen after a fire broke out at its vinyl chloride monomer plant in Yamaguchi prefecture, southern Japan, forcing the company to cut its output in Japan by 30 percent.

Sony Corp (6758.T) rose 1.4 percent to 1,373 yen after a group led by the company won the auction for record label EMI's music publishing operations in a deal valued at $2.2 billion on Friday.

(Additional reporting by Lisa Twaronite; Editing by Michael Watson)