Nikkei rallies 2% on softer yen, Japan leadership contest in spotlight

Japan's Nikkei share average rallied more than 2 per cent on Friday, buoyed by further softening of the yen after a strong advocate of "Abenomics" took the lead in first-round votes in the ruling Liberal Democratic Party's leadership election.

The Nikkei ended 2.32 per cent higher at 39,829.56, its highest close since July 19, while the broader Topix finished up 0.73 per cent at 2,740.94.

The gains extended after right-wing economic security minister Sanae Takaichi and former defence minister Shigeru Ishiba qualified for the second round of voting to replace Prime Minister Fumio Kishida as the leader of Japan's ruling party.

The market was reacting to Takaichi, an advocate of deceased former premier Shinzo Abe's "Abenomics" stimulus policies and a vocal opponent of further interest rate hikes in Japan, coming in with the most votes in the first round, analysts said.

"She advocates for monetary easing and fiscal stimulus... which is a plus for stocks," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.

Under such policies, the yen tends to track weaker and yields trend in a downward direction, making it easy for share prices to rise, he said.

The yen fell to its lowest since early this month to 146.495, a plus for exporters who benefit from a softer domestic currency when repatriating funds, as markets braced for a Takaichi victory.

Japanese chip-related stocks led the rally, supported by overnight gains in their US peers, with Tokyo Electron climbing 6.66 per cent to deliver the biggest boost to Nikkei.

Lasertec surged 8.19 per cent and was the biggest percentage gainer, while Advantest climbed 4.48 per cent.

Other major shares also made sizable gains, with Nikkei heavyweight Fast Retailing adding 2.53 per cent, SoftBank Group rising 2.26 per cent and Daikin Industries ending 6.28 per cent higher.

In a run-off vote after market hours, Shigeru Ishiba prevailed over Takaichi, which will likely drag the market down in the short term, analysts said.