Japan's Nikkei average edged up 0.5% on Wednesday after falling nearly 2% the previous day when a liquidity squeeze hit Chinese shares, and market players said they would continue looking to Chinese equities and U.S. economic data for direction.
The Nikkei gained 8% in November, however, and analysts said recent yen weakness and expectations of a further recovery in the U.S. economy would continue to lend support, although Japanese shares will be weighed down by worries that the euro zone's credit crisis may spread.
"Investors were worried over interest hikes in China and the euro zone yesterday and are now waiting for this Friday's U.S. employment figures and Christmas sales figures to trade on," said Fumiyuki Takahashi, equity strategist for Barclays Capital Japan.
"So investors want to watch the market a bit more closely with so many uncertainties around. But the long-term view is rather positive with high expectations for Japanese companies to do well this financial year," he said.
The Nikkei ended the day up 51.01 points at 9,988.05, above support at the 200-day moving average, now at 9,911.59.
The broader Topix index added 0.6 percent to 866.07.
Trade was light on the Tokyo exchange's first section, with 1.71 bln shares changing hands, its lowest volume this week. Advancing stocks outnumbered declining issues, 861 to 634.
Shanghai stocks were slightly higher, erasing earlier falls. Data showed China's factories revved up production in November, but a big jump in input prices pointed to more inflationary pressure in the pipeline and a need for more monetary tightening.
In Europe, the euro zone's troubles showed no sign of abating after Standard and Poor's put Portugal's A-minus credit ratings on review for a possible downgrade on Tuesday, citing uncertainties related to a potential financial rescue by the EU and the IMF.
EUROPE CENTRE STAGE
But market players in Tokyo said the impact on Japan's economic fundamentals would likely be limited and Japanese stocks would likely continue to move higher.
"Europe's credit problems are now taking the centre stage, even though they have always existed, as debate about the U.S. QE2 have calmed down and tightening worries in China haven't become an obvious, big trading factor yet," said Masaru Hamasaki, senior strategist at Toyota Asset Management.
"Once the problems in Europe are taken care of to a certain degree, we can expect to see a rebound in the euro. Assuming dollar/yen remains stable, the Japanese market will likely start seeking higher ground again."
Shares of exporters were mixed, with Honda Motor rising 2.3% to 3,080 yen and Kyocera down 1.6% at 8,400 yen. One trader cited buying of auto-related stocks by overseas investors.
Toyota Motor Corp was also up 2.8% at 3,310 yen.
Toyota said it had filed a lawsuit against Motors Liquidation, the company responsible for the discarded assets of the former General Motors, seeking damages related to the closure of their joint factory, New United Motor Manufacturing, or Nummi.
Shares of Japan's No. 2 telecom carrier KDDI extended gains, rising 1.6% at 486,000 yen after its president said the company was in talks on possible acquisitions, seeking to expand consumer services in Asia.
But shares of Nippon Electric Glass and Asahi Glass slid after Goldman Sachs lowered its ratings for the stocks.
The brokerage cited growing concerns that the current oversupply of LCD glass will likely continue at least in 2011.
It cut its rating on Nippon Electric Glass to "neutral" from "buy" and downgraded Asahi Glass to "sell" from "neutral".
Nippon Electric Glass shares lost 3.2% to 1,138 yen and Asahi Glass shed 3.0% to 905 yen.
