Tokyo stocks closed 0.99 per cent higher on Thursday as the market welcomed a rebound in the euro ahead of a German parliamentary vote on the new euro zone rescue plan, brokers said.
The benchmark Nikkei 225 index at the Tokyo Stock Exchange ended up 85.58 points at 8,701.23. The broader Topix index of all first-section issues rose 8.23 points or 1.09 per cent to 762.30.
Japanese shares faced early selling pressure after US stocks fell on Wednesday as investors became cautious ahead of a new EU-IMF audit of Greece and the German parliamentary vote.
Falling commodity prices sent linked stocks lower.
But market sentiment turned positive in afternoon trade as the euro rebounded on growing speculation that Germany's 620-member Bundestag is likely to vote in favour of an expansion of the eurozone bailout fund, brokers said.
German lawmakers will decide whether to expand the scope and size of the EU's current rescue fund — the European Financial Stability Facility — which has already helped bail out Ireland and Portugal.
Berlin's contribution would increase to more than 200 billion euros ($270 billion) in debt guarantees — the largest share.
While the vote is expected to pass in Germany, apparent discord and dithering among Europe's leaders on how to contain the debt crisis has continued to unnerve markets.
"The market theme is likely to shift from bailing out Greece to how to contain the impact of a Greece default, which would take time to resolve," Cosmo Securities strategist Toshikazu Horiuchi told Dow Jones Newswires.
The euro fetched $1.3608 in Tokyo afternoon trade against $1.3536 in New York late Wednesday. The European single unit also rose to 104.09 yen from 103.60 yen.
The dollar traded at 76.51 yen, little changed from 76.53 yen.
Major banks rose on the euro's gain as Mitsubishi-UFJ Financial Group jumped 2.30 percent to end at 355 yen with Sumitomo Mitsui Financial Group up 2.25 percent at 2,219 yen.
China-linked shares were mixed as Fanuc was up 1.11 percent at 10,860 yen but Komatsu lost 0.59 percent to 1,682 yen, as falls in Shanghai stocks prompted worries over Chinese growth.
Nikon was down 2.31 percent at 1,815 yen by noon despite a local media report that the company's six-month group operating profit will likely jump 230 percent.
Investors are disappointed that Nikon's full-year outlook seems to remain unchanged, said Hisatsune Kobayashi, general manager of global investment strategy at SMBC Nikko Securities.
Tokyo Electric Power was down 11.40 percent at 233 yen on a Nikkei daily report that the utility, facing massive compensation costs, promised not to ask for a debt waiver in letters to financial institutions this year, said dealers.