(Bloomberg) -- Japanese stocks surged the most since early March as weak US economic data sparked a global rally on hopes for slower Federal Reserve tightening.

Technology shares were the biggest boost to the Topix, which closed 3.2% higher, after a drop in US Treasury yields prompted investors to buy growth stocks. The benchmark has now pared its loss for the year to under 5%, compared with slides of more than 20% in key indexes of US and regional equities. The Nikkei 225 Index climbed 3%.

Asian stocks extended gains in afternoon trading following the Australian central bank’s smaller-than-expected rate hike. Overnight, the S&P 500 Index posted its biggest rise since July after a drop in the Institute for Supply Management’s gauge of factory activity suggested the US economy may be faltering.

“It is still too early to conclude that the downtrend in the US market has really ended,” and Japanese stocks remain subject to global market turmoil, said Ikuo Mitsui, a fund manager at Aizawa Securities Group. Risk factors up ahead include corporate results and the US midterm elections, he added.

Japanese stocks have held up better this year as the persistent weakening of the yen to a 24-year low lifted the profit outlook for the nation’s exporters. Market moves have been spurred by a divergence in central bank policy, as the Fed pursues a hawkish path to tame inflation while the Bank of Japan maintains its easy-money stance.

Tuesday’s rally in stocks came even as a gauge of inflation in Tokyo accelerated for a fourth consecutive month to rise at the fastest pace since 1992. Investors were also unfazed by the launch of a North Korean missile earlier in the day.

Aizawa’s Mitsui said Japanese stocks stand to gain more from the normalization of demand and increase in inbound travel. Other market watchers have touted the nation’s relatively limited hit from inflation versus other nations.

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Morgan Stanley prefers Japan over the US among global equities, strategists including Andrew Sheets wrote in an Oct. 3 report, noting that Japan’s equity-hedged yield in dollar terms has risen to 7.7%, the highest since 2001.

Not everyone is bullish. Nomura Securities Co. sees a possible end to Japan’s outperformance given rising short positions among commodity-trading advisors.

“CTAs shifted to expanding their aggregate net short position last week, after being close to neutral between early August and mid-September,” Yoshitaka Suda, a strategist, wrote in a note Monday.

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(An earlier version of this story corrected the name of the index in the lead paragraph.)

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