The Nikkei stock index gained 0.29 percent Tuesday with the market gaining some support from Wall Street's rise overnight and the yen's drop against the U.S. dollar.
The benchmark Nikkei 225 index gained 42.68 points to finish at 14,975.97, while the Topix index of all first-section shares added 0.29 percent, or 3.52 points, to close at 1,238.20.
Traders here said that the rise in U.S. shares provided some relief and the U.S. dollar rising to 101.94 yen from 101.84 yen gave some export and tech-related issues with a broad exposure to overseas market a boost.
"Rises in the U.S. stocks provided a sense of relief, indicating that a risk-averse mood has not spread among global markets, despite the intensifying geopolitical risk in Iraq," said Masashi Akutsu, equity strategist at SMBC Nikko Securities Inc.
But while jitters still remained about exactly how the situation in Iraq will unfold, brokers said that the market reacted well Tuesday to the government's unveiling of its draft economic growth strategy, expected to be formalized into policy by Prime Minister Shinzo Abe later this month.
Investors, like Yutaka Miura, a senior technical analyst at Mizuho Securities Co., highlighted the government's plan in the draft to cut corporate tax in Japan to make it more internationally competitive and hopefully attract more foreign investment here in the future as part of Abe's structural reforms.
"Investors took the announcement of the draft as positive news as it showed direction toward a corporate tax cut although a specific schedule has yet to be established," said Miura.
Broadly speaking, strategists maintained their position that stocks here are still deemed undervalued and this is underpinning the market and following instances of profit-taking over the last couple of days, fears of the market overheating seem to be receding, although some market players said that if the situation in Iraq does flair up, the market here will undoubtedly take a hit.
Some investors, brokers said, were seen to be hitting the sidelines Tuesday in a wait-and-see-approach, ahead of more news coming out of Iraq, accounting for a fairly thin day of trade today.
"Valuations don't look strikingly high and if anything, stocks are actually undervalued," said Toshihiko Matsuno, chief strategist at SMBC Friend Securities Co.
"However, there's a possibility of turbulence ahead depending on the situation in Iraq, so investors have a strong desire to wait and see."
But exporters regained traction as the yen dropped against the U.S. dollar and consumer electronics maker Panasonic advanced 0.9 percent to 1,192 yen and camera maker Canon added 0.14 percent to close at 3,391 yen.
Konica Minolta jumped 6.2 percent to 930 yen, following JPMorgan raising its rating on the stock to from "neutral," to " overweight" on the firm's solid earnings.
Yaskawa Electric also closed in positive territory, gaining 1.7 percent, to 1,291 yen and Uniqlo clothing chain operator Fast Retailing rose 0.30 percent to close the day at 33,250 yen.
But Mitsubishi Heavy Industries dropped 1.42 percent to 621 yen, following releasing the details of their joint plans with Siemens to bid for French Alstom's energy assets.
But some game related issues found favor Tuesday, following news here that the government is considering relaxing its rules on gambling and hence game manufacturer Konami Corp. gained 2.1 percent to 2,300 yen, while Oizumi Corp., known for manufacturing equipment and components used in pachinko parlors, rocketed 8 percent to close at 1,049 yen.
Trading volume on Tuesday dropped to 1.67 billion shares on the Tokyo Exchange's First Section, down from Monday's volume of 1.82 billion shares, with advancing issues outnumbering declining ones by 1,219 to 488.