Japan's Nikkei share average rose 3.8% on Friday, rebounding from a three-year closing low hit the previous day, on hopes for a more comprehensive solution to the financial crisis that has roiled markets worldwide.
Financial shares such as top lender Mitsubishi UFJ Financial Group surged after news that U.S. Treasury Secretary Henry Paulson has been promoting a proposal to congressional lawmakers that would create an entity to deal with the blns of dollars of bad debt still clogging the financial system.
The idea has been compared to the Resolution Trust Corp formed after the savings and loan industry meltdown in the 1980s, and market analysts in Tokyo said hopes for the entity largely contributed to the day's market jump.
"The set-up of such entity could lead to a fundamental solution to the problems. With this, we can avoid an extreme decline in the economy for now," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.
"But bad loans will continue to exist as long as fundamentals keep getting worse. The situation would be a lot different if the government could come up with measures that can impact the economy."
The benchmark Nikkei average added 431.56 points to end at 11,920.86, after booking its lowest close since June 2005 on Thursday. The broader Topix climbed 4.7% to 1,149.12.
The day's rally in a broad range of stocks helped the market pare some of the losses logged in a tumultuous week in which AIG was bailed out, Lehman Brothers went bankrupt and Merrill Lynch was forced into partnership with Bank of America.
Despite a series of unsettling events, the Nikkei is down just 2.4% for the week, though it has lost about 22% so far this year.
Takahiko Murai, a general manager of equities at Nozomi Securities, said investors are still waiting to see details of the U.S. crisis plan.
"The market reaction could still change depending on the nature of the new entity. One focus will be whether they will inject public funds to boost the capital of financial institutions," he said.
The Fed and other top central banks also offered on Thursday to pump blns of dollars into global markets to ease funding pressures.
