Oct. 11 (Bloomberg) -- Japanese stocks climbed, with the Topix index rising by the most in 17 months. Banks such as Mitsubishi UFJ Financial Group Inc. jumped as a machinery orders report added to evidence economic growth will bolster earnings.

``The banking business in Japan is becoming better and better,'' said Masaki Iso, who oversees $6.1 billion as head of Japanese equities at Yasuda Asset Management Co. in Tokyo. ``I'm bullish on bank shares for the long term.''

Goldman, Sachs & Co. raised its view on banks to ``attractive'' on expectations they will earn more from loans as a recovery from last year's recession signals an end to more than seven years of deflation and Japan's near-zero interest rates.

The Topix gained 33.47, or 2.4 percent, to 1405.99 at the 3 p.m. close in Tokyo, the biggest gain since May 19, 2004. Banks accounted for 27 percent of the rally. The Nikkei 225 Stock Average added 328.97, or 2.5 percent, to 13,556.71, rising by the most since Oct. 4 last year.

The Topix and Nikkei had the biggest fluctuations today among equity markets included in global benchmarks. Japan's financial markets were closed yesterday for a national holiday.

Indexes surged in the afternoon after a government report showed machinery orders jumped 8.2 percent in August as companies carried out plans to spend more on factories and help the world's second-largest economy sustain growth this quarter and next.

The result exceeded all 26 estimates in a Bloomberg News survey and was more than three times as much as the 2.5 percent median estimate.

Increased Lending?

Banks led the rally, with a measure of lenders jumping 5.8 percent for the biggest advance in two years. The industry index has been among the Topix's best-performing groups in the second half, gaining 35 percent, on signs that economic growth will bolster loan demand, enable banks to raise lending margins and end a legacy of bad loans that has weighed on profit.

Lenders will repay half the funds that they received in state bailouts ahead of schedule, the Nihon Keizai newspaper said two days ago. The economy expanded at a 3.3 percent annual pace in the second quarter, triple an initial government estimate.

Lending rose in August, after adjusting for factors such as currency fluctuations, securitizations and bad loan write-offs, the first gain since the Bank of Japan started tracking the figures in October 1998.

Mitsubishi UFJ, the world's largest bank by assets, jumped 110,000 yen, or 8.2 percent, to 1.45 million. Mitsubishi Tokyo Financial Group Inc. last month said raised its first-half profit forecast by 64 percent on lower bad-loan costs. The bank merged with UFJ Holdings Inc. this month to form Mitsubishi UFJ.

`Attractive'

Mizuho Financial Group Inc., Japan's second-largest bank, gained 42,000 yen, or 6.2 percent, to 721,000. Sumitomo Mitsui Financial Group Inc., the third-largest lender, advanced 52,000 yen, or 5.3 percent, to 1.04 million.

Mitsubishi UFJ, which earlier intended to repay all public funds by the fall of 2007, is planning to accelerate its payment schedule by more than a year, according to the Nihon Keizai report. Sumitomo Mitsui also intends to move up plans to repay state funds it received, the newspaper said.

Banks have received about 12.4 trillion yen ($109 billion) in funds from earlier government bailouts, the report said.

David Atkinson, bank analyst at Goldman's brokerage unit in Tokyo, raised his view on the banking industry from ``neutral.'' Japan's three biggest lenders have the potential to climb by as much as 30 percent to account for short-term interest rates rising to 1.25 percent.

Consumer prices will probably gain next year and prompt the Bank of Japan to raise rates, according to a Bloomberg News survey of economists. That in turn will allow banks to boost lending rates to their customers. Mizuho said today it will raise the rate charged to its most creditworthy customers to 1.8 percent from 1.55 percent tomorrow.

`Positive Surprises'

``Positive surprises are still possible in areas such as banking,'' wrote Robert McKillop, head of Japanese equities at Edinburgh, Scotland-based Standard Life Investments, which manages about $225 billion globally. ``Major banks have largely eliminated their non-performing loan problem.''

McKillop made the comments in a report distributed yesterday on the firm's fourth-quarter global outlook.

Among machinery stocks, Komatsu Ltd., the world's No. 2 construction equipment maker, added 72 yen, or 5 percent, to 1,512. Mitsubishi Heavy Industries Ltd., Japan's largest heavy machinery maker, climbed 16 yen, or 4.2 percent, to 402. JGC Corp., Japan's biggest engineering company, gained 98 yen, or 5.2 percent, to 1,967.

``Capital spending is going to remain strong for the rest of the fiscal year,'' said Yoshimasa Maruyama, senior economist at BNP Paribas SA's brokerage unit in Tokyo. That will keep supporting Japan's economy this year, he said.

Nintendo, Sanyo

Toyota Motor Corp., the world's largest automaker by value, climbed 140 yen, or 2.8 percent, to 5,240. The company plans to increase spending 15 percent to a record 1.25 trillion yen as demand for its cars increases.

Nintendo Co., the world's biggest maker of hand-held video games, dropped after saying that first-half sales unexpectedly fell because it sold fewer GameCube home consoles and less game software in North America.

Nintendo fell 370 yen, or 2.8 percent, to 12,970. The company after the market closed on Oct. 7 said sales for the six months ended Sept. 30 will be 175 billion yen, down 7.9 percent from a May estimate of 190 billion yen. The company also trimmed its full-year sales goal by 3.8 percent.

Sanyo Electric Co., the world's third-largest maker of digital cameras, dropped 7 yen, or 2.4 percent, to 285. The company said its Chief Financial Officer Yoichiro Furuse quit on Oct. 7 over disagreements on management policy. Sanyo is cutting jobs and closing factories and may sell its Osaka headquarters building to curb costs under a Sept. 27 reorganization plan.

Shares of trading companies advanced. Toyota Tsusho Corp., a member of the Toyota group, will acquire Tomen Corp. to become Japan's sixth-largest trading company, the Nihon Keizai said, without saying where it obtained the information.

Tomen jumped 23 yen, or 11 percent, to 229. Toyota Tsusho gained 45 yen, or 2.1 percent, to 2,145.

JGC Corp. (1963 JT)
Komatsu Ltd. (6301 JT)
Mitsubishi Heavy Industries Ltd. (7011 JT)
Mitsubishi UFJ Financial Group Inc. (8306 JT)
Mizuho Financial Group Inc. (8411 JT)
Nintendo Co. (7974 JO)
Sanyo Electric Co. (6764 JT)
Sumitomo Mitsui Financial Group Inc. (8316 JT)
Tomen Corp. (8003 JT)
Toyota Motor Corp. (7203 JT)
Toyota Tsusho Corp. (8015 JT)

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

Last Updated: October 11, 2005 05:00 EDT