The Nikkei share average <.N225> rallied 1.3 percent to 20,666.07, the highest close since Dec. 19. For the week, the index rose 1.5 percent.
Market sentiment was lifted by a Wall Street Journal report that U.S. Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs imposed on Chinese imports and suggested offering a tariff rollback for trade talks scheduled for Jan. 30.
All but two of the Topix's 33 subsectors were in the black. Sea transport shares, as well as domestic-demand sectors such as real estate and construction, outperformed.
Mitsui OSK Lines soared 2.7 percent and Kawasaki Kisen added 2.4 percent after the baltic dry index <.BADI>, or freight charges, rallied 2.1 percent overnight.
Mitsubishi Estate surged 3.7 percent, Sumitomo Realty & Development soared 2.2 percent and Kajima Corp gained 2.3 percent.
Japanese shares have recovered nearly 10 percent from a low of 18,948.58 hit on Dec. 26 but they still lag behind a recovery in U.S. shares, where the Dow Jones Industrial Average has recovered to 24,000, a level it had traded above before the year-end market rout.
"Today's market rally is straightforward as investors take heart from hopes of a trade talk resolution. But a strong yen is limiting the Nikkei's upside," said Hikaru Sato, a senior technical analyst at Daiwa Securities, adding that the market is focusing on whether the Nikkei will recover past 21,000, which was considered a support line before the market slid last month.
In the Bank of Japan's tankan survey in December, automakers predicted the dollar would trade at 109.75 yen for the year ending March, compared with 106.80 yen forecast in September. Electronics products makers estimated the dollar would trade at 109.01 yen, compared with 106.67 yen.
The dollar was up 0.1 percent at 109.35 yen.
"The current dollar-yen levels are below what some manufacturers are expecting. There are worries for Japanese corporate earnings in the near future," Daiwa's Sato said.
Underscoring investor concerns, Japanese precision motor maker Nidec Corp slid 8 percent before it ended 1.1 percent lower after it cut its annual operating profit outlook by a quarter as the deepening U.S.-China trade war dampened demand.
Nidec's weak outlook dragged down shares of air-conditioner maker Daikin Industries and industrial equipment maker Minebea Mitsumi, which dropped 2.4 percent and 2.6 percent, respectively.
The broader Topix rose 0.9 percent to 1,557.59.
(Editing by Jacqueline Wong)
By Ayai Tomisawa
