Nikkei logs worst July performance in 5 years

Sentiment was also lifted by a mixed bag of positive news for individual stocks with Canon Inc announcing its second share buyback in two months, Mitsubishi Electric Corp reporting better-than-expected profits and struggling Renesas Electronics Corp managing to secure loans.

The benchmark lost 3.5 percent this month although its decline was stemmed by signals from European Central Bank that it will defend the euro and growing expectations that the U.S. Federal Reserve will launch a new round of stimulus.

On Tuesday, the Nikkei advanced 0.7 percent to 8,695.06, breaking above 8,687.93, the 50 percent retracement of its rally from June 4 to July 4.

"I think a lot of it is month-end and ... earnings as well," a senior dealer at a foreign bank said.

"There are some decent corporate news out there. Canon announcing a buyback is good. Mitsubishi Electric earnings are good."

Camera and printer maker Canon, which was battered last Thursday after it cut its full-year operating profit outlook, climbed 5.8 percent as the top-weighted gainer.

Mitsubishi Electric rose 3.3 percent after its first quarter operating profit beat market expectations by 8 percent.

Renesas jumped 16.4 percent after major shareholders Mitsubishi Electric, Hitachi Ltd and NEC Corp said they would together provide financial support to help prop up the struggling chipmaker.

PANASONIC ADVANCES

Panasonic Corp strengthened 4.6 percent ahead of its earnings as investors expected the struggling electronics maker to post better quarterly results.

After the bell, Panasonic posted a nearly seven-fold gain in first quarter operating profit after cutting costs to offset losses in its TV unit hammered by competition from foreign rivals.

But Chubu Electric Power Co sank 5.9 percent to a 30-year closing low after Japan's third-largest utility said there would be a year's delay in the completion of safety measures needed for the restart of its sole nuclear plant.

The utility also reported a 12.5 billion yen loss in the last quarter because of higher prices for oil and gas as it struggled to meet demand after shutting down its Hamaoka nuclear plant.

WEAK SEASON

Although 55 percent of the 42 Nikkei companies that have reported so far have met or beaten market expectations, it is lower than the 60 percent that did so in the previous quarterly earnings season, data from Thomson Reuters StarMine showed.

"On the whole this is a pretty poor earnings season and there seems to be more companies with disappointing results than ones with positive surprises," said Takashi Oba, senior strategist at Okasan Securities.

The broader Topix put on 0.6 percent to 736.31.

About 1.76 billion shares changed hands on the Topix, up from Monday's 1.45 billion and last week's average of 1.68 billion.

The senior trader said investors should avoid companies with large exposure in Europe.

Underscoring the concerns about the euro zone crisis, Japan's fund managers' allocation for bonds shot to a record high in July and their equities allocations slumped to the lowest level in 11 months, a Reuters poll showed.

Macquarie Research said in a note on May 30 that among the Japanese firms which have large sales from Europe were electric tools maker Makita Corp, bicycle parts maker Shimano Inc, Canon, business machines and printer maker Konica Minolta and measuring instruments maker Horiba Ltd