TOKYO Japan's Nikkei share average rose 1.7 percent on Thursday to its highest close in six weeks, helped by short-covering as the quarter-end neared, although it was still on track for the worst quarterly performance in two years.
The Nikkei .N225 was up 143.62 points at 8,874.11, its highest close since May 17 but holding below its 200-day moving average at 8,940.91.
"The main driver is short-covering. Over the past couple of months, foreign investors have accumulated large short positions," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
Banks and insurers were some of the strongest gainers, with Mitsubishi UFJ Financial Group (8306.T) up 2.8 percent as the second most-traded stock by turnover on the main board. Insurer Tokio Marine Holdings Inc (8766.T) climbed 2.9 percent.
Drugmaker Eisai Co Ltd (4523.T) rose 3.1 percent to its highest close in 27 months after U.S. health regulators approved the first new weight-loss drug in 13 years, allowing Arena Pharmaceuticals Inc ANRA.O to bring its Belviq pill to market. Eisai has the marketing rights of the drug in the United States.
"U.S. stocks went up because pension funds are window-dressing ahead of a mid-year review, while in Japan there's an unspoken agreement to curb selling during shareholder meeting season," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley
Fujito said nearly 70 percent of stocks on the Tokyo Stock Exchange have been advancers in the last three days of June for the past 50 years.
The benchmark Nikkei has rallied 7.7 percent since a six-month low on June 4, but remains down 12 percent for the quarter, on track for its worst quarterly performance in two years, hurt by the deepening euro zone debt crisis and slowing U.S. and Chinese growth.
Thanks to its best quarterly rise in 24 years in January-March - a gain of 17.3 percent - the Nikkei is up 5 percent for the year.
RECORD WEIGHTING ON DOMESTIC STOCKS
As worries over Europe mounted, Japan fund managers' weightings in domestic stocks jumped to record highs in June. A Reuters poll of 11 Japan-based major institutional investors showed the average weighting of domestic stocks rose to 41.4 percent from 37.1 percent last month.
By contrast, a year ago Japanese stocks accounted for only about one-quarter of the managers' equity portfolios.
Data from Japan's Ministry of Finance showed foreign investors, who make up around two-thirds of trading in Japanese market, were net buyers of Japanese equities last week for the second straight week after eight weeks of net selling.
The broader Topix .TOPX index advanced 1.8 percent to 758.81 on Thursday. Its trading volume was moderate, at 88 percent of the daily average for the past 90 days.
Although Japanese equities are vulnerable to any new shocks from Europe - where leaders begin a two-day meeting later on Thursday about the debt crisis - these currently offer better yields than benchmark 10-year Japanese government bonds.
The Topix carried a dividend yield of 2.47 percent as of Wednesday, yielding 165.7 basis points over the 10-year JGBs, not far from a 3-1/2-year high of 181.6 basis points hit on June 4, according to Thomson Reuters Datastream.
The spread was much lower compared with a gap of 272.4 basis points between Germany's bluechip DAX .GDAXI index and the 10-year Bunds, but was higher than 68.2 basis points offered by the U.S. S&P 500 .SPX over 10-year Treasury yields.
Among components in the Topix, Kyokuto Securities Co Ltd (8706.T) offered the highest dividend yield, at 6.79 percent, followed by Kansai Electric Power Co (9503.T) at 6.48 percent and software development firm Jastec Co Ltd (9717.T) at 6.16 percent, according to Datastream. ($1 = 79.7600 Japanese yen)
(Additional reporting by Sophie Knight; Editing by Richard Borsuk)