By Sophie Knight
TOKYO (Reuters) - Japan's Nikkei share average advanced 1.4 percent on Tuesday as index heavyweight Softbank Corp <9984.T> rebounded after the company reassured investors a $20 billion deal to buy 70 percent of Sprint Nextel Corp would not dilute their shares.
Softbank bounced back 9.6 percent after having lost over 20 percent since rumours of the deal emerged last Friday. Three of the four banks that sources say will lend Softbank cash for the deal - Mizuho Financial Group Inc <8411.T>, Sumitomo Mitsui Financial Group <8316.T> and Mitsubishi UFJ Financial Group <8306.T> - gained between 1.1 and 1.6 perc e nt.
"It's just clarity on the structure. People didn't know if they were going to have to pay higher than what was rumoured, they were concerned about dilution, and (Softbank CEO Masayoshi) Son came out and flat-out denied that," said a partner at a foreign hedge fund.
"But given how much it was sold off before, it's just a relief rally," said the partner, who did not want to be named. "There's a lot more execution risk than before so I don't think it's going to go back where it was."
The Nikkei added 123.38 points to 8,701.31 as investors picked up battered cyclical stocks that were hurt last week on worries about poor earnings from companies hit by a global slowdown, a strong yen and anti-Japanese sentiment in China.
A slightly softer yen against the dollar on strong U.S. retail sales and expectations of further easing from the Bank of Japan also put a floor under exporters including consumer electronics companies, with Toshiba Corp <6502.T> gaining 3.8 percent and Sony Corp <6758.T> up 2.4 percent.
However, analysts attributed the day's gains to short-covering, saying little new money was flowing into the market despite the atmosphere turning more "risk-on", with the defensive food sector down 0.1 percent and the riskier shipping subindex <.ISHIP.T> up 3.7 percent.
"There at two factors at play; firstly, the feeling that bad earnings and forecast cuts are already priced in, and secondly, Obama's slight recovery after losing a debate in the U.S. election run-up, " said Eiji Kinouchi, chief technical analyst at Daiwa Securities.
"Romney's financial plan may be more pro-business but he is against monetary easing, while no one thinks he will be able to scrap capital gains tax with U.S. stocks at these heights."
However, Kinouchi warned that the market was likely to remain boxed in a range until the election as investors hold back from making big moves.
Kirin Holdings Co <2503.T> lost 2.4 percent after the beer and beverages maker cut its sales target for 2015 to 2.3 trillion yen, down from a previous forecast of 3 trillion, due to a sluggish domestic market.
The broader Topix <.TOPX> rose 1.3 percent to 732.40 in moderate trade, with volume at 98.3 percent of its 90-day average.
Many companies on the Topix are now trading below book value, with an average price-to-book ratio of 0.9, according to Thomson Reuters Starmine, compared with the S&P 500's ratio of 2.2.
However, estimates from Thomson Reuters Starmine show expectations for an average negative earnings surprise from Topix companies of 1.4 percent for 2012, while an average 0.1 percent positive su r prise is expected for S&P 500 stocks.
"The forecasts are far from over so we're not going to see these gains sustained... we're just sitting and waiting for earnings to come through now," said Jun Yunoki, equity analyst at Nomura Securities.
Out of the 8 percent of companies on the S&P that have reported results so far, 58 percent have topped expectations.
(Editing by Eric Meijer)