Nikkei up 1 percent on bailout hope but worries weigh

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.

Top lender Mitsubishi UFJ Financial Group (8306.T) gained 3.4 percent to 923 yen and No.2 Mizuho Financial Group (8411.T) added 1.8 percent to 450,000 yen.

Exporters battered earlier this week also helped lead the Nikkei higher on short-covering, while defensive shares such as drugmakers also advanced.

Canon jumped 4.2 percent to 3,980 yen, becoming one of the top contributors to the Nikkei 225, while Honda Motor Corp (7267.T) rose 1.6 percent to 3,140 yen.

Takeda Pharmaceutical Co Ltd (4502.T) climbed 5.1 percent to 5,520 yen and Astellas Pharma Inc (4503.T) gained 4.8 percent to 4,580 yen.

But Mitsui OSK Lines Ltd (9104.T) and other shipping firms slid after the Baltic Exchange's chief sea freight index for global raw materials trade .BADI tumbled more than 8 percent on Tuesday, falling for a seventh straight day.

Mitsui OSK dropped 4.1 percent to 848 yen and Kawasaki Kisen Kaisha Ltd (9107.T) shed 4.4 percent to 604 yen. Nippon Yusen (9101.T) fell 3.1 percent to 647 yen.

The London-based index fell 8.2 percent on Tuesday and has lost 73 percent since hitting a record in May.

Trade was moderate on the Tokyo exchange's first section, with 1.9 billion shares changing hands, almost in line with last week's daily average.

Advancing stocks outnumbered decliners 954 to 661.

(Reporting by Aiko Hayashi; additional reporting by the Tokyo newsroom; Editing by Michael Watson)