Japan shares rise as easing Middle East tension shifts focus to trade deal

TOKYO, Jan 10 (Reuters) - Japanese shares rose on Friday as demand for riskier assets increased, buoyed by de-escalation of diplomatic tension in the Middle East and hopes that the so-called Phase 1 U.S.-China trade agreement will boost corporate earnings.

The benchmark Nikkei index ended up 0.47% at 23,850.57 points. The index rose 0.82% in a week of volatility when a Wednesday Iranian missile strike on U.S.-led forces in Iraq rippled through global financial markets.

The attack, which followed the U.S. killing of a prominent Iranian general last week, sparked fears of wider conflict.

However, global equity markets quickly stabilised after both the United States and Iran signalled the desire to avoid war.

Market focus consequently returned to the signing of a trade deal between the United States and China to defuse a months-long trade war, which would reduce risk in the global economic outlook.

“Geopolitical risks simply do not tend to have a long-term impact on financial markets,” said Shusuke Yamada, head of foreign exchange and Japan equity strategy at Merrill Lynch Japan Securities.

“There were some risks to the outlook last year, like trade friction, but these factors are not in play this year. There is no reason to sell risky assets, which is good for equities. I expect the Nikkei to rise to 25,000 by the end of March.”

U.S. President Donald Trump, who last month said the Phase 1 deal would be signed on Jan. 15, on Thursday said the agreement could be signed “shortly thereafter”.

The deal is likely to reduce U.S. tariffs on Chinese goods and boost Chinese purchases of U.S. agricultural products - measures whose effects are widely expected to propagate throughout the corporate world, pushing up earnings.

There were 120 advancers on the Nikkei index on Friday against 91 decliners, while the remaining 14 members of the index were unchanged.

The largest percentage gainers were industrial machinery maker IHI Corp at 5.14%, followed by semiconductor manufacturing equipment maker Screen Holdings Co Ltd gaining 4.05%, and convenience store operator Seven & i Holdings Co Ltd at 3.7%.

The largest percentage losses were apparel retailer Fast Retailing Co Ltd at 2.78%, followed by Chubu Electric Power Co Inc losing 2.35%, and automaker Isuzu Motors Ltd at 1.92%.

Fast Retailing cut its full-year profit outlook due to worse-than-expected quarterly earnings results on Thursday, hit by Hong Kong protests and a South Korean consumer boycott of Japanese goods that dented sales at its Uniqlo stores.

The broader Topix index rose 0.35% to 1,735.16 on Friday. For the week, the Topix was up 0.80%.

The volume of shares traded on the Tokyo Stock Exchange’s main board was 1.09 billion, compared to the average of 1.12 billion over the past 30 days.

Reporting by Stanley White; Editing by Rashmi Aich and Christopher Cushing