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TOKYO (Reuters) - Japan's Nikkei average broke above 8,800 for the first time in five weeks on Thursday, as sentiment was buoyed by a softer yen after the U.S. Federal Reserve held back from more aggressive stimulus steps to prop up the economy.
Shrugging off a survey showing China's vast manufacturing sector slowing for the eighth straight month, the Nikkei .N225 rose 0.8 percent to 8,824.07, driven by exporters, such as Honda Motor Co Ltd (7267.T), up 3.5 percent, and Canon Inc (7751.T), adding 1.4 percent.
The Fed disappointed some investors by delivering only a limited expansion of monetary stimulus on Wednesday. It extended its "Operation Twist" beyond its original June expiration to the end of the year to boost the flagging U.S. recovery. It also cut its GDP growth estimates for the year.
"The fact they eased at all is a plus for the U.S. economy, while holding off on QE3 is good for the Japanese market as it didn't strengthen the yen," said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities.
"The other factor buoying the Nikkei today is short-covering after Korea and Taiwan didn't make the MSCI upgrade."
New York-based equity index provider MSCI maintained South Korea and Taiwan in its "emerging market" category on Thursday, dashing hopes of an upgrade. Some investors expecting an upgrade had sold Nikkei futures in the run-up to the decision on the assumption it would draw attention away from the Japanese market, but were forced to cover their short-bets.
The benchmark Nikkei hit its highest closing level since May 17 and has recovered 7 percent from a six-month low on June 4. However, it is still down 12.5 percent on the quarter, weighed by concerns about a deepening euro zone sovereign debt crisis and slowing growth in the United States and China.
Foreign investors were net buyers of Japanese shares last week after eight straight weeks of net selling, data from Japan's Ministry of Finance showed. Foreign investors bought 58.8 billion yen ($740.93 million) of Japanese equities.
"Japanese investors are also coming back to the market. Last week we saw buying from Japanese trust banks," said Jun Yunoki, equity analyst at Nomura.
"A few funds cut their allocations to equities even though the market went down. Usually, they would buy when the market is down but because they cut down on allocations, they weren't able to buy. That starts to end and they are coming back to the market."
Index heavyweight Softbank Corp (9984.T) climbed 2.9 percent to its highest close in nine months, with a trader citing the mobile operator's ability to further improve its network quality and handset line-up.
"It's a big play on iPhones ... with the new iPhone 5 and iPad coming on board," a trader said. "The share price is hovering above 2,500 yen. We think it is one of the stocks that could see some growth. We are definitely on the positive side."
The broader Topix .TOPX advanced 0.9 percent to 753.96. Nearly 1.79 billion shares changed hands on the Topix, up from Wednesday's 1.53 billion and last week's average of 1.46 billion.
Renesas Electronics Corp (6723.T) advanced 3.1 percent after sources said its major shareholders had agreed to provide the loss-making chipmaker with 50 billion yen towards its restructuring.
The stock has gained nearly 69 percent since hitting a record low on May 29, although it is still down 29 percent this year.
Short interest in Renesas remained high, with 90.92 percent of the stock that is available to be borrowed out on loan as of June 19, down from 90.03 percent on June 14, data from research firm Data Explorers showed.
Mitsubishi Heavy Industries Ltd (7011.T) eased 0.6 percent, extending the previous session's 3.1 percent fall after a U.S. court said the Japanese firm was responsible for a nuclear plant leak at a California nuclear power plant, as it did not properly test the pipes before installing them.
Another trader said it would be a buying opportunity if the stock were to fall to near 300 yen. ($1 = 79.3600 Japanese yen)
Additional reporting by Sophie Knight; Editing by Jacqueline Wong