Japanese shares ended Monday higher, as Jerome Powell's dovish comments whetted risk appetite. Concerns that the yen will strengthen if the Federal Reserve cuts interest rates capped gains, however.

The broader Topix Index rose 0.1% as of market close in Tokyo, with the Nikkei 225 gaining 0.4% after climbing as much as 1.3% in morning trade. Trading houses and machinery stocks lifted the Topix the most, while retail and IT shares dragged.

"Powell's speech was dovish, removing the block for a September rate cut and boosting risk sentiment," said Anna Wu, a cross-asset investment strategist at VanEck in Sydney.

The Dow Jones Industrial Average reached a record Friday after a speech by Powell led traders to boost wagers on a Fed rate cut as soon as next month. The S&P 500 gained the most since May as investors bought shares that tend to do well on lower interest rates.

Enthusiasm was more muted in Tokyo, as a 1% surge in the yen against the dollar Friday contained buying.

"Due to what happened at Jackson Hole, it looks like the exchange rate will head toward yen appreciation, making it difficult for investors to pile into Japanese shares," said Yutaka Miura, senior technical analyst at Mizuho Securities Co..

Japanese stocks' recent rally to record highs is also fueling some caution, capping benchmarks' gains, Miura said. "Once the Nikkei crosses the 43,000 mark, it starts to look overvalued, and investors will want to lock in profits," he said.

The Nikkei closed at 42,807.82 Monday. It briefly rose beyond 43,000 earlier this month.

Tech names like Taiyo Yuden Co.and Disco Corp provided some support to the blue-chip Nikkei. Tech could be a major winner in Japan if the Fed reduces rates, said Tim Waterer, chief market analyst at KCM Trade.

"Lower US rates could see investors looking further afield for returns, and Japan's tech sector could be the recipient of greater capital inflows as a result," Waterer said.

Source: Bloomberg