advanced to a four-month high on Tuesday, tracking overnight Wall Street gains following signs of a potential de-escalation of tensions in the Middle East. Bank shares rose after the Bank of Japan signalled it is still on track to raise interest rates in the longer term. The broader equity market, however, largely shrugged off widely expected decisions to keep borrowing costs steady and slow the pace of government bond purchase reductions from next April.

The Nikkei closed 0.6% higher at 38,536.74. Earlier in the day, it reached 38,581.25 for the first time since February 21. The broader Topix added 0.4%.

All three major U.S. stock indexes advanced strongly on Monday as market sentiment improved with Iran seeking a ceasefire with Israel.

The latest flare-up in the Middle East more closely resembles the Six-Day War of 1967 than other longer-lasting conflicts in the region, said Tony Sycamore, an analyst at IG.

"The market's relief over this has been augmented by a cooling in crude oil prices after Israel left key Iranian oil export infrastructure untouched." Meanwhile, the BOJ maintained short-term rates at 0.5% by a unanimous vote at the two-day policy meeting that ended on Tuesday. It also decided to halve the pace of debt purchase reductions from next April to help support the bond market. At the same time, policymakers see consumer prices as still on track to meet the central bank's target, with BOJ Governor Kazuo Ueda likely to reiterate a commitment to raising rates at his press conference.

"Despite referencing domestic political developments, tariff negotiations and Middle East geopolitical tensions, the BOJ highlighted a steady rise in inflation, maintaining a possible pathway for another rate hike this year, potentially in October," said Shoki Omori, chief desk strategist at Mizuho Securities.

The Topix banking index ended the day up 0.3%, reversing morning session losses.

Japanese growth shares still outperformed, though, with a Topix index of the securities up 0.5%, compared with a 0.2% rise for value shares.

Chip-related stocks were among the Nikkei's top performers. Disco was the biggest percentage gainer with a 6.3% surge. Advantest climbed 2.4% and Tokyo Electron advanced 2.9%.

Out of the Nikkei's 225 components, 136 rose, 83 fell, and six ended flat. ($1 = 144.6400 yen)