Nikkei up 1 percent on bailout hope but worries weigh

By Aiko Hayashi

TOKYO (Reuters) - The Nikkei average rose 1 percent on Wednesday, rebounding from a three-year closing low hit the previous day, as financials such as Nomura Holdings (8604.T) gained on chances that a U.S. financial bailout plan will be revived.

Canon Inc (7751.T) and other exporters climbed after Wall Street had its best day in six years on Tuesday on expectations for the bailout plan after its surprising rejection on Monday on Capitol Hill. .N

"The market mood has calmed down from yesterday's panic sell-off as investors realized that if they think rationally, the bailout plan can be still approved even with some amendments," said Junichi Misawa, a senior fund manager at STB Asset Management.

"Having said that, we can't let down our guard yet as there is still a lot of uncertainty about the plan and this alone won't be the ultimate solution of the problem."

President George W. Bush and congressional leaders pledged to continue talks on the bailout plan and the Senate agreed to vote on Wednesday night on a new version of the package that will include a big increase in the amount of bank deposits protected by the government's insurance program.

The benchmark Nikkei gained 108.40 points to end at 11,368.26. It fell 4.1 percent on Tuesday to book the lowest finish since June 2005. The broader Topix added 1.3 percent to 1,101.13.

But worries about the health of the domestic and global economies capped gains.

Market participants noted that Japan has plenty of worries of its own after the Bank of Japan's quarterly tankan survey showed sentiment among big manufacturers turning negative for the first time in five years.

"The survey confirmed Japan is in recession," said Mamoru Yamazaki, chief economist at RBS Securities.

"With emerging economies also slowing, weak exports will continue to hold back Japan's economy."

The key index for big manufacturers was minus 3, deteriorating for a fourth straight quarter and the first negative reading since the June 2003 poll, when the index was minus 5.

"Problems in Europe are now making headlines and investors also want to see how that develops," said Katsuhiko Kodama, a senior strategist at Toyo Securities.

After claiming some of the biggest names on Wall Street in recent weeks, shockwaves from the crisis engulfed Europe and beyond this week.

FINANCIALS GAIN

Financials gained ground, with Nomura, Japan's biggest brokerage, up 6 percent at 1,405 yen and Daiwa Securities Group (8601.T) climbing 3.4 percent to 763 yen.