By Andrew Walker BBC World Service economics correspondent

The rise poses questions about the rally's sustainability

The Nikkei 225 rose 326.63 points, ending the day at 10,670.18.

Traders said signs of economic improvement at home and in the United States fuelled the rise.

The country has suffered more than a decade of economic weakness, but recent economic statistics, for Japan and for its largest export market the United States, have given stock market investors some cause for optimism.

False dawn?

However, the stronger stock market might just be a sign of yet another fitful and unsustainable bursts of recovery.

There have been several in the past decade, none of them sustained for very long.

"I think it's purely a cyclical recovery," Gary Evans, chief strategist at the investment bank HSBC in Tokyo, told BBC World Business Report.

"Companies haven't really got to grips with their costs yet, I don't think monetary policy is working any better than it was before, the government really hasn't come up with any structural reforms."

Currency concerns

The value of the yen is an important element in the Japanese economic equation.

Many investors remain nervous despite the Nikkei's rise

Over the last year or so, Japan - like many other Asian countries - has been intervening heavily by buying dollars to prevent the yen from rising.

The country has done this because a stronger yen would undermine the competitiveness of Japanese industry.

But many US companies would like to see a stronger yen which could reduce the deficit in US trade with Japan.

The US Treasury Secretary John Snow is in Tokyo on Monday and has had the opportunity to raise some of these issues with Japanese leaders.

Japan has said that it conducted no intervention in August, although some analysts say that may have been partly in anticipation of Mr Snow's visit.