The benchmark Nikkei Stock Average climbed 675.04 points, or 5.24 percent, closing at 13,555.01. On Friday, the index had tumbled 146.09 points, or 1.12 percent, finishing at 12,879.97, its lowest finish since December 1985.
|Click here for overseas markets|
Share prices surged in the afternoon after Japan's upper house of Parliament passed a package of bills to create a framework to deal with banks that have failed.
The package already passed the more powerful lower house on Oct. 2. The law marks a major step in cleaning up the bad debt problem and in turning around the economy, which is in its deepest recession in decades.
Investors also were encouraged by weekend Japanese newspaper reports that a government council on economic strategy will soon propose tax cuts, traders said.
Also supporting the market was Friday's rally in blue chips on Wall Street. The Dow Jones industrial average rose 167.61, or 2.17 percent, to close at 7,899.52 points, just shy of 7,908.25, where it began the year.
The legislation passed Monday provides a framework for the bailout but does not specify the amount of taxpayer money that can be used.
The ruling Liberal Democratic Party originally proposed using about $86 billion, but reportedly agreed with main opposition parties late last week to increase that to $435 billion.
Trading was brisk with about 570 million shares changing hands on the first section, compared with Friday's turnover of 581 million shares. Advances outnumbered declines 966 to 196, with 115 unchanged.
The broader Tokyo Stock Price Index of all issues listed on the first section was up 40.84 points, or 4.16 percent, to 1,023.34. On Friday, the TOPIX fell 19.00 points, or 1.93 percent.
In currency dealings, traders said the dollar slid on selling from Japanese institutional investors and possibly by hedge funds.
Anxiety over the economic health of hedge funds, known for betting large sums on global currency movements, and their impact on U.S. markets are among factors contributing to uncertainties over the dollar.
The dollar's weakness also derived from the prospect of lower German interest rates, which nudged the German mark down against the yen. That led to the Japanese currency's relative strength against the dollar, traders said.
Last week, the dllar plunged nearly 14 percent, falling as low as 111.45 on Thursday. Selling was fueled largely by hedge funds moving to dump dollars in uncertain markets.
Written By Kozo Mizoguchi