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Nikkei Rallies on Bargain Hunting; Fed in Focus

Tokyo stocks closed up 2.7 percent on Monday to regain the 13,000 mark as investors bought battered exporter stocks, while gains in the rest of Asia's equity markets were capped ahead of this week's Federal Reserve policy meeting.

Japan's Nikkei ended above the key 13,000 level, and Australia's S&P ASX 200 closed just below an earlier seven-day high. Amid laggards, the Shanghai Composite and South Korea's benchmark closed down 0.3 percent after trading flat for most of the session.

(Read More: Fed in Driving Seat for Asian Markets This Week)

What's on Tap

The Fed's two-day policy-meeting starts on Tuesday and is likely to be watched closely for clues into the central bank's plans for paring back some of its monetary stimulus. Speculation about possible 'tapering' has roiled markers in recent weeks and sent the Dow Jones Industrial Average tumbling over 100 points on Friday.

Symbol
Name
Price
 
Change
%Change
NIKKEI
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HSI
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ASX 200
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SHANGHAI
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KOSPI
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CNBC 100
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"I think the message we are getting is that the Fed would like to keep markets focused on the idea of tapering but also give them a bit of a sedative to say we are starting to unease but we're not tightening," said Richard Yetsenga, head of global markets research, at ANZ bank in Sydney.

Leaders from the Group of Eight (G-8) developed nations gather in Northern Ireland on Monday for a two-day summit. The role of central banks, loose monetary policy and currency weakness are expected to be topics under discussion.

(Read More: G8 Summit: Lots of Talk—But What Else?)

Nikkei Up 2.7%

Defensive plays and exporters drove gains in Japanese stocks, helping the benchmark index reverse opening losses. Taiheiyo Cement jumped 8.5 percent while chemicals manufacturer Tokuyama surged over 16 percent.

Also supporting sentiment was a slight weakening in the yen. The currency traded at about 94.9 per dollar, compared to around 94 in early trade.

Real estate stocks were under pressure with Mitsubishi Estate down 2.4 percent, while Sumitomo Realty & Development eased over 1 percent. The sector has been behind the majority of the Nikkei's 23 percent gains since the start of 2013 as it is expected to benefit the most from Japan's push to reflate the economy.

(Read More: Nikkei May Now Be a Trade Only for the Brave)

Australia Higher

Banks led the recovery story in Australian equities, taking the index to its highest levels in over a week at 4,818 points with Macquarie Group higher by 2.5 percent while Australia New Zealand Banking rose nearly 2 percent.

Miners declined, ignoring a rise in iron ore prices to $113.60 a ton. Lynas fell 6.4 percent and Panoramic Resources lost over 7 percent.

(Read More: Big Rally in Aussie Stocks a Mere 'Dead Cat Bounce'?)

Shares of property group Lend Lease skidded over 7 percent after the firm announced a restructuring of its Australian construction and infrastructure business.

Caution set in ahead of Tuesday's release of the minutes from the Reserve Bank of Australia's June meeting. Investors will be watching out for clues on the direction of further interest rate cuts.

"Several major investment banks have been calling for another rate cut before the Federal election. The issue with this call is that after the July meeting there will be six weeks till the September 14 election date. That will wipe out any chance of a cut in August or September. This means it's now or never, (post-September), for the cut," said Evan Lucas, market strategist, IG in a note.

Shanghai Down 0.3%

Tight liquidity conditions in China weighed on sentiment after the government failed to sell all its bonds at an auction on Friday for the first time in nearly two years.

The central bank's refusal to inject liquidity into the economy has resulted in a spike in money market rates over the past ten days, which caused Friday's bond auction failure, analysts say. Higher money rates put a strain on inter-bank funding and therefore put banks at risk for loan defaults.

Shares of Everbright Bank jumped 2.4 percent while New China Life Insurance popped 5 percent after getting a boost from the government. Central Huijin, China's main holding company for state-owned financial institutions, raised their stake in both firms to boost market sentiment.

Kospi Below 1,900

Jitters over North Korea kept South Korean investors at bay. On Sunday, Pyongyang offered high-level talks with the United States to ease tensions on the Korean peninsula, only days after it cancelled planned official talks with Seoul.

Shares of chip makers weighed, with LG Display and SK Hynix falling over 3 percent each.

The benchmark index pared losses since hitting a fresh 2013 low at 1,878 points earlier in the session.

By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC