Nikkei average edged up 0.2 percent in choppy trade on Tuesday, buoyed by Canon Inc and other exporters as the yen held steady against the dollar, but worries that it may only be a brief respite limited gains.
Japan Airlines failed to add to gains made the previous day despite news that Air France-KLM was joining a list of suitors seeking a minority stake in the loss-making Japanese carrier.
But Daikin Industries Ltd, the world's No.2 air conditioner maker, jumped 5 percent after it said it planned to start selling an air purifier that it claims can break down the H1N1 flu virus completely.
"The market is being supported by a halt in the yen's appreciation against the dollar and as hot money is flowing into commodities and stocks encouraged by near zero interest rate policies in Japan, the United States and Europe," said Takahiko Murai, general manager of equities at Nozomi Securities.
"But players in the bond market have been factoring in the possibility that the (global) economy might hit a second bottom going forward and optimism in the stock market about an economic recovery will also likely fade eventually."
U.S. and Japanese government bond yields have been falling over the past several weeks on doubts about economic recovery prospects.
The benchmark Nikkei rose 15.56 points to 10,217.62, after falling 2.3 percent the day before. The broader Topix dipped 0.2 percent to 932.52.
Trade was thin and choppy, with the benchmark venturing into negative territory at one stage when the dollar briefly fell back below 91 yen.
The dollar was up 0.2 percent at 91.07 yen, after hitting a 7-month low at 90.18 on Monday. Investors fret about a stronger yen as it curbs exporters' profits when they are repatriated.
"The market clearly fell too far yesterday, and we're seeing some short covering, but this sort of drifting is likely to continue for some time," said Hideyuki Ishiguro, a supervisor at the investment strategy department of Okasan Securities.
"We need to watch and see if the yen continues to be strong. Also, some investors are waiting to see what sort of policies the new government enacts, so some may refrain from buying."
Yukio Hatoyama will take office on Wednesday after his Democratic Party's huge election win over the long-dominant Liberal Democratic Party.
The Nikkei business daily said on Tuesday that Hatoyama has decided to appoint veteran lawmaker Hirohisa Fujii as finance minister.
JAL IN SPOTLIGHT, DAIKIN JUMPS
Air France-KLM is in talks to inject hundreds of millions of dollars into JAL, a source familiar with the matter said.
Delta Air Lines and American Airlines are in separate 'early stage' talks with Japan's carrier. All hope to gain access to its route network.
JAL lost 3.4 percent to 170 yen after surging 8 percent on Monday.
Shares of Daikin Industries jumped to 3,350 yen.
Property developers gained after Deutsche Bank raised its sector view to "mildly overweight" from "underweight", citing a gradual rebound in commercial real estate transactions and the possibility that Tokyo office vacancy rates may peak significantly earlier than previously expected.
Mitsui Fudosan rose 0.7 percent to 1,781 yen, while Sumitomo Realty & Development added 1.8 percent to 1,909 yen and Tokyu Land climbed 2.9 percent to 430 yen,
Exporters rose on short covering. Honda Motor Co added 0.5 percent to 2,795 yen and Toyota Motor Corp gained 0.3 percent to 3,750 yen.
Canon advanced 2.9 percent to 3,550 yen, helped by news that it would start providing multi-functional printer models to Hewlett-Packard later this year.
Some 1.6 billion shares changed hands on the Tokyo exchange's first section, below last week's daily average of 2 billion.
Declining stocks beat advancings ones, 913 to 596.
