Tokyo's Nikkei average jumped three percent on Wednesday, its biggest gain in seven months, to end at a nine-month high as heated activity and improving corporate sentiment encouraged investors to buy large-cap blue chips.

Gains on Wall Street helped lift NEC Corp and other technology shares. Also sought were banks and communications firms, both laggards in the current bull run, with information system integrator NTT Data Corp rising 10.88 percent.

The Nikkei was up 3.38 percent at 9,592.24, its highest close since September 19. It was the biggest one-day percentage gain since late November.

The capital-weighted TOPIX index of all first-section issues was up 3.16 percent at 945.24, while the TOPIX core 30 large-cap index added 4.22 percent.

Analysts said that just as when the Nikkei cleared the 9,000 psychological bar last month, large cap issues took the lead on Wednesday as the Nikkei broke above the 9,500 level.

Turnover on the main board totaled a hefty 1.37 trillion yen ($11.48 billion), marking a second straight session with more than one trillion yen in shares changing hands.

It was the highest turnover since April 21, 2000, if settlement days for index derivatives contracts are excluded.

"This is a typical liquidity-driven market since the main players, I think, are individual investors and proprietary dealers," said Koji Muneoka, head of domestic sales trading at HSBC Securities.

"The rise in turnover has made them feel at ease in trading large-cap issues and their activity is boosting turnover further."

Another support was an unexpectedly strong improvement in corporate sentiment in the quarterly "tankan" survey of corporate sentiment by the Bank of Japan, released on Tuesday.

Analysts said, however, that a swift recovery in the Nikkei since it hit a two-decade low in late April must have contributed greatly to the tankan results. The tankan showed sentiment at large manufacturers, measured as a diffusion index, improved to minus five in June from minus 10 in March.

Therefore, uncertainty will remain over Japan's tepid economic recovery until corporations actually start spending more and consumers become more willing to spend despite continued falls in prices.

"It's an improvement in sentiment, or a reversal of overdone pessimism, that is behind the current rally," said Jun Terasaka, a senior fund manager at Toyota Asset Management.

"When compared with a rally backed up with solid economic fundamentals, the current one looks pretty unreliable, although buying targets will likely extend gradually to smaller-cap issues, helping the firmness get going in the coming months."

FURTHER RALLY?

Looking ahead, technical charts suggest the next target for the Nikkei is around 9,842, a half-way recovery from the 11-month downturn from May 2002.

But some saw a limited upside since the outlook of the U.S. economy, Japan's main export market, remained uncertain.

"Some domestic institutional investors are joining in the rally as latecomers," said Daisuke Uno, chief market economist at Sumitomo Mitsui Banking Corp.

"But if there are signs which make them doubt healthy growth in the U.S. economy, the inflow of money from foreigners in particular would die down," he said.

The Nikkei has put on 26 percent since late April, driven by active buying by foreigners aimed at raising the weighting of equities due to receding fears over global deflation.

Despite the rally, the Nikkei is still down 75 percent from its peak at the end of the nation's asset bubble in 1989 and down more than 50 percent from the same date six years ago when the Asian financial crisis began.

On Tuesday, U.S. stocks closed higher after a sharp morning sell-off as investors focused on bright spots in a key U.S. manufacturing survey.

That helped lift Japanese technology shares, with chip-related issues taking the lead.

Chip and computer conglomerate NEC was up 5.9 percent at 700 yen, its highest close since August.

Its rival Toshiba Corp was up 4.47 percent at 444 yen and Tokyo Electron Ltd, the world's second-largest semiconductor equipment maker, was up 7.72 percent at 6,280.

The rising market was helping ease fears about Sumitomo Mitsui Financial Group (SMFG) and its peers, which have suffered huge losses on their shareholdings in recent years.

SMFG, Japan's second-biggest banking group, was up 7.58 percent at 298,000 yen, the most active issue by value.

Mizuho Financial Group Inc, the world's biggest bank by assets, was up 18.45 percent at 122,000 yen.