TOKYO Japan's Nikkei average climbed to an 8-1/2-month high on Monday and a technical chart showed the rally may last, as the yen weakened after the conservative Liberal Democratic Party won a landslide election, calling for aggressive monetary easing.
The Nikkei .N225 rose 0.9 percent to 9,828.88, the highest closing level since April 3, while the yen hit a 20-month low of 84.48 yen to the dollar, boosting the appeal of exporters' shares. A weaker yen helps boost Japanese exporters' overseas earnings when repatriated and increases their competitiveness.
Exporters finding higher ground included Nissan Motor Co (7201.T), Sony Corp (6758.T), Daikin Industries Ltd (6367.T) and industrial robot maker Fanuc Corp (6954.T), up between 1.4 and 5.5 percent.
The landslide victory gives the LDP and its ally, the New Komeito party, a two-thirds majority needed to overrule parliament's upper house in most matters, allowing the new government a freer hand to implement its policy.
Analysts said that the LDP's victory was priced in to the market, but the market cheered a 'super majority,' which gives next Prime Minister Shinzo Abe more clout to pressure the Bank of Japan to implement an aggressive monetary policy.
"A lot of investors were preparing to take profits from recent gains, and they may still be looking for the timing as their positions on yen selling and stock buying have accumulated," said Nobuhiko Kuramochi, a strategist at Mizuho Securities.
"But now that the yen is weakening, they will hesitate to take a risk of being left behind, so they don't want to reduce their positions too much."
The benchmark Nikkei has risen 13.48 percent over the past month, spurred by yen weakness after Abe called for the BOJ to undertake "unlimited easing" and set an inflation target of 2 percent as well as big spending on public works to kick-start the ailing economy.
The rally has taken the year-to-date gain for the Nikkei to 16.25 percent, ahead of a 12.4 percent rise in the U.S. S&P 500 .INX and a 14.3 percent gain in the pan-European STOXX Europe 600 index.
Monday's gain took the index further into "overbought" territory, with its 14-day relative strength index at 78.34, way above the 70-level which is deemed as overbought and often signals a possible near-term pull back.
But analysts said that there are signs that the rally may last for the mid-term. The toraku ratio, or up-down ratio, used for the first section of the Tokyo Stock Exchange, was at 140.4. The ratio is calculated by dividing the 25-day moving average of stocks that gained by the 25-day average of those that fell. A level above 120 signals an overheated market.
"If the toraku ratio is somewhere between 120 and 140, it usually indicates a near-term pull-back. But if it's over 140 and nearing 150, it signals that the energy is too strong that it can take the market even higher," said Hikaru Sato, a senior technical analyst at Daiwa Securities.
The toraku ratio pierced the 140-line for the first time since February 27, when the ratio started rising, which helped the Nikkei rise by 6.5 percent over the next month.
"If the ratio stays above the 140-level for the next two or three days, a rally lasting a month or so will be more promising," Sato said.
Power utilities surged in reaction to the LDP win, noting the party opposes a nuclear-free policy. Tokyo Electric Power Co (9501.T), whose shares have been battered by the meltdown at its Fukushima nuclear plant after last year's earthquake, jumped 32.9 percent and Kansai Electric Power Co (9503.T) rallying 17.7 percent. Tokyo Electric Power was the sixth-most traded stock on the main board by turnover.
Shares of financial and property firms, which tend to benefit the most in a reflationary situation, also gained.
The real estate sector .IRLTY.T gained 2.3 percent, while Nomura Holdings Inc (8604.T), Japan's top brokerage, rose 3.0 percent and lender Mitsubishi UFJ Financial Group (8306.T) added 1.8 percent and was the second-most traded stock.
Nomura Securities highlighted 10 stocks that would likely outperform under an LDP administration, including Sumitomo Osaka Cement Co Ltd (5232.T), Taiheiyo Cement Corp (5233.T), contractors Obayashi Corp (1802.T) and Kajima Corp (1812.T), real estate firm Mitsui Fudosan Co Ltd (8801.T), home builder Sekisui House Ltd (1928.T) and Mazda Motor Corp (7261.T).
"We estimate that global funds are still about 2 percentage point underweight Japanese equities. Given the election results, we see a high probability of foreign investors becoming substantial net purchasers of Japanese equities to reduce their risk of underexposure to Japan," it said in a note.
"We now see a possibility of the equity market surpassing our end-March 2013 Nikkei average target of 10,250."
The broader Topix .TOPX index advanced 0.9 percent to 807.84 in active trade, with 2.85 billion shares changing hands on the main board, compared with last week's average daily volume of 2.29 billion shares.
Struggling TV maker Sharp Corp (6753.T), the most-traded stock by turnover, surged 11.9 percent to extend this month's rally to 75 percent on short-covering after it said in early December that U.S. chipmaker Qualcomm Inc (QCOM.O) would invest $120 million. But the stock is still down 55 percent year-to-date.
(This version of the story corrects trading volume amounts in the penultimate paragraph.)
(Editing by Sanjeev Miglani)