Japan's Nikkei average hit a 15-month closing high on Tuesday after solid U.S. manufacturing data boosted investor confidence in the economy, lifting some blue-chip shares such as Canon Inc.
But the market pared earlier gains after sources said Sumitomo Mitsui Financial Group was planning a $8.7 bln share sale, helping the yen to strengthen on prospects of foreign investors buying the stock.
"The story about SMFG's capital raising led the yen to strengthen and that was the main reason why shares of exporters lost ground," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
Large-scale equity fund-raising by Japanese firms put pressure on the market during 2009. Analysts have been expecting SMFG and Mizuho Financial Group to follow in the footsteps of top lender Mitsubishi UFJ Financial Group, which aims to raise 1 trillion yen through a share sale.
The benchmark Nikkei inched up 0.3 percent to 10,681.83, its highest close since Oct. 3 2008, after rising as high as 10,791.04 at one stage. It remained well above its 25-day moving average of around 10,100.
The broader Topix rose 0.4 percent to 919.57.
Japan Airlines Corp gained 2.3 percent after the struggling airline said on Monday that more than two-thirds of its employees have agreed to proposed pension cuts, clearing a key hurdle in its push to reduce its pension shortfall, a prerequisite for a state bailout.
The dollar slipped 0.8 percent against the yen to around 91.80 yen, having fallen from a four-month peak of 93.22 yen hit on trading platform EBS on Monday.
Investors fret about a stronger yen as it eats into exporters' profits when there are repatriated. Toyota Motor Corp slid 2.2 percent to 3,805 yen
"Profit-taking is weighing on the market as the Nikkei has gone way above its 25-day moving average and as the dollar/yen is now trading at 91 yen," said Fumiyuki Nakanishi, manager at SMBC Friend Securities.
Data showing the Institute for Supply Management's facturing index in December rose to its highest level since April 2006, and helped push both the Dow and the S&P 500 to their highest close in 15 months.
The Japanese market also gained on economic recovery hopes following the data, with shares of some high-tech exporters advancing.
Trade picked up on the Tokyo exchange's first section, with 2.1 billion shares changing hands, above last week's daily average of 1.6 billion.
Advancing shares outnumbered declining ones, 792 to 715.
SMFG PARES GAINS
Sumitomo Mitsui finished up 1.5 percent at 2,653 yen, after earlier rising as high as 2,755 yen prior to the news.
Without such fundraising, Japanese banks would fall short of new global capital requirements, analysts have said. The share sale is likely to put pressure on second-ranked Mizuho, which has yet to announce fundraising plans.
Shares of JAL rose to 90 yen, after jumping over 30 percent on Monday on news the government had asked the state-owned Development Bank of Japan to double its credit line to JAL to 200 billion yen ($2.2 billion).
"It'll take time for things to be solved, and there's likely to be a lot of really volatile share price moves, a lot of short-term buying and selling," said Kenichi Hirano, operating officer, Tachibana Securities.
"At this point, there are so many possibilities out there that it's hard to predict what exactly will happen."
Resource shares gained after a broad range of commodities from oil to gold soared on Monday as investors favoured riskier bets over the dollar amid fresh signs that the U.S. economy was poised for recovery.
Trading houses Mitsui & Co climbed 2.9 percent to 1,373 yen and Mitsubishi Corp advanced 2.5 percent to 2,376 yen. Oil and gas field developer Inpex Corp gained 1.8 percent to 728,000 yen.
Metal stocks rose, with Sumitomo Metal Mining Co adding 2.1 percent to 1,418 yen.
Orix Corp jumped 4.4 percent to 6,590 yen after the Nikkei business daily said the Japanese financial services conglomerate plans to invest 300 billion yen in promising Chinese companies in areas such as finance and infrastructure over the next three years.
