Jan. 23 (Bloomberg) -- Japanese stocks rebounded from the worst two-day drop in 17 years after the U.S. Federal Reserve cut its benchmark interest rate to revive growth in the world's biggest economy.

Toyota Motor Corp., the world's largest automaker by market value, jumped the most in three months and Nintendo Co., maker of the Wii game machine, snapped two days of losses.

``The emergency rate cut has strengthened investors' confidence in U.S. policy,'' said Yoshihiro Okumura, who helps oversee the equivalent of $365 million at Chiba-gin Asset Management Co. ``Investors' sentiments will probably recover when the direction of U.S. monetary policies becomes clear.''

The benchmark Nikkei 225 Stock Average dropped 18 percent this year to yesterday's close on mounting concern that the global economy is slowing. A rout in shares globally wiped out as much as $7.3 trillion in market value this year.

The Nikkei average gained 256.01, or 2 percent, to 12,829.06 at the close in Tokyo. The broader Topix index advanced 29.98, or 2.5 percent, to 1,249.93. Over the previous two sessions, the Nikkei dropped 9.3 percent and the Topix fell 9.1 percent, the biggest two-day decline for both since 1990.

Toyota, which makes 38 percent of its sales in North America, gained 220 yen, or 4.5 percent, to 5,100, while Nintendo jumped 3,200 yen, or 6.3 percent to 54,200.

U.S. Rate Cut

The U.S. central bank yesterday slashed the target overnight lending rate to 3.5 percent from 4.25 percent, the biggest cut in 23 years. It was also the first time since 2001 for the Fed to reduce the rate after an unscheduled meeting. Options contracts indicated an 80 percent chance the central bank will lower its benchmark rate by another half point to 3 percent at its meeting next week.

Japanese shares' gains were reduced in the afternoon session amid speculation that the Fed's action may not be enough to avert a recession.

The rate cut is ``still insufficient to spark a complete recovery in global finance markets or to factor into a full-scale rebound for Japanese stocks,'' Shinichi Ichikawa, an analyst at Credit Suisse Group, wrote in a report dated today. ``Our near- term concern is the risk of a rising yen.''

The yen recently traded at 106.47 after falling to as low as 107.38 in the morning session.

The Topix Banks Index climbed 3.1 percent. Mitsubishi UFJ Financial Group Inc., Japan's largest bank by market value, added 34 yen, or 3.9 percent, to 897, while Sumitomo Mitsui Financial Group Inc. advanced 37,000 yen, or 5.3 percent, to 737,000.

Shipping Lines

The Topix Marine Transportation Index climbed 5.3 percent. The benchmark's 14-day relative strength index, a moving average based on gains and falls, dropped to 28 yesterday. A reading below 30 signals to some investors that shares are poised to rise. The index lost 22 percent this year to yesterday's close.

Mitsui O.S.K. Lines Ltd., Japan's second-largest shipping line, rallied 61 yen, 5.7 percent, to 1,138, while Nippon Yusen K.K., the biggest, gained 29 yen, or 4 percent to 756.

Bridgestone Corp., the world's biggest tire maker, added 126 yen, or 8.1 percent, to 1,687. A measure of rubber products was the top performing industry gauge in the Topix. CLSA Asia Pacific raised its rating on Bridgestone's stock today to ``buy'' from ``outperform.''

Sony Corp., the world's second-biggest maker of consumer electronics, lost 140 yen, or 2.7 percent, to 4,970. Goldman, Sachs & Co. yesterday cut its rating on Sony to ``neutral'' from ``buy,'' citing a stronger yen against the dollar and a slowdown of the U.S. economy.

Nikkei futures expiring in March rose 2.3 percent to 12,800 in Osaka, and climbed 2.6 percent to 12,765 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Toshiro Hasegawa in Tokyo at thasegawa@bloomberg.net;

Last Updated: January 23, 2008 02:08 EST