March 10 (Bloomberg) -- Japanese stocks rose for a second day after the Bank of Japan said borrowing costs will remain near zero and indicated that increasing domestic demand will help propel a recovery in the world's second-largest economy.

Companies that do most of their business at home, including Seven & I Holdings Co. and Mitsubishi UFJ Financial Group Inc., led the gain. Aeon Co., Japan's No. 2 retailer, jumped after the Nihon Keizai newspaper said earnings beat the company's estimate.

``Investors are reassured zero interest rates will continue for some time, and given Japan's strengthening economic growth, companies stand to profit,'' said Koji Uchida, who helps manage $47 billion at Mitsubishi UFJ Asset Management Co. in Tokyo. The Nihon Keizai report on Aeon ``shows we're finally seeing earnings growth at retailers from their main business.''

The Nikkei 225 Stock Average climbed 78.72, or 0.5 percent, to 16,115.63 at the 3 p.m. close in Tokyo. The broader Topix index advanced 6.26, or 0.4 percent, to 1647.27. Indexes jumped yesterday after the central bank determined the economy is finally strong enough for it to abandon a five-year policy of fighting deflation, while keeping interest rates near zero.

The back-to-back gains were the first for both benchmarks this month. Exporters also rose after a drop in the yen against the dollar inflated the value of their overseas sales.

``The yen doesn't look like it's going to strengthen anytime soon, which is a plus for exporters,'' said Uchida.

Gains in indexes tapered off in the afternoon session following the release of government report showing machinery orders fell 6.2 percent in January for the first drop in four months as companies put off plans to invest.

The decline was more than the median estimate of a 5 percent decrease in a Bloomberg survey.

Economic Optimism

For the week, the Nikkei gained 2.9 percent, the biggest advance in six weeks. The Topix climbed 2.1 percent, the second time the index has posted a weekly gain in three weeks.

Today, companies that rely on domestic demand advanced on optimism that near zero interest rates will encourage borrowing and spending as Japan's economic growth gathers pace.

Seven & I, Japan's biggest retailer, gained 80 yen, or 1.8 percent, to 4,510. Mitsubishi UFJ, the world's largest bank by assets, rose 40,000 yen, or 2.4 percent, to 1.72 million. Sumitomo Realty & Development Co., Japan's third-largest property developer, gained 105, or 3.7 percent, to 2,970.

Nomura Holdings Inc., Japan's largest brokerage, gained 45 yen, or 2 percent, to 2,330.

Steady Recovery

``The economy is steadily recovering,'' Bank of Japan Governor Toshihiko Fukui told parliament today. ``Employment conditions are clearly improving and consumption is increasing. The chances of domestic demand continuing to improve are high.''

Fukui also said rates will be held near zero for the time being and the bank will probably continue to keep borrowing costs near zero should inflationary pressure be held low.

Twelve of 16 economists surveyed by Bloomberg News predict the central bank will raise rates from near zero by year-end.

Retailers also got a boost after the Nihon Keizai reported Aeon probably had an operating profit, or sales minus the cost of goods sold and administrative expenses, of about 31 billion yen ($262 million) on an unconsolidated basis in the year ended Feb. 28, 1 billion yen more than it had expected.

The company, which has 450 stores nationwide, also plans to offer banking services to customers and employees next year to bolster revenue, the Nihon Keizai reported. The company said in a statement it's considering various options to enter the banking business while no decision had yet been taken.

Earnings Boost

Aeon climbed 45 yen, or 1.6 percent, to 2,810. Daiei Inc., a supermarket operator which is being reorganized by Marubeni Corp. and Advantage Partners Inc., rose 150 yen, or 4.6 percent, to 3,380. Fast Retailing Co., the operator of Japan's Uniqlo casual clothing store chain, added 370 yen, or 3.5 percent, to 10,820.

Automakers paced gains among exporters after a drop in the yen boosted the value of their dollar-denominated sales.

Honda Motor Co., Japan's third-largest automaker, rose 90 yen, or 1.3 percent to 7,050. Honda's annual operating profit gains about 12 billion yen for every 1-yen drop against the dollar, according to an estimate by Merrill Lynch & Co.

Toyota Motor Corp., the world's largest automaker by value, advanced 20 yen, or 0.3 percent, to 6,290. Nissan Motor Co., Japan's No. 2 carmaker, rose 8 yen, or 0.6 percent, to 1,358.

The dollar rose to 118.49 yen in Tokyo, from 118.21 late yesterday in New York and 116.38 yen a week ago.

Indexes declined in early trading as the settlement price for Nikkei 225 futures and options for March delivery was determined. The settlement price, fixed at 16,001.84 today, is set once all stocks in the Nikkei 225 begin trading.

Nikkei 225 futures expiring in June added 0.5 percent to 16,010 in Osaka and gained 0.3 percent to 16,005 in Singapore.

Aeon Co. (8267 JT)
Daiei Inc. (8263 JT)
Fast Retailing Co. (9983 JT)
Honda Motor Co. (7267 JT)
Mitsubishi UFJ Financial Group Inc. (8306 JT)
Nissan Motor Corp. (7201 JT)
Nomura Holdings Inc. (8604 JT)
Seven & I Holdings Co. (3382 JT)
Sumitomo Realty & Development Co. (8830 JT)
Toyota Motor Corp. (7203 JT)

To contact the reporter for this story: Michael Tsang in Tokyo at mtsang1@bloomberg.net.

Last Updated: March 10, 2006 01:37 EST