Stocks soared in Tokyo, with the Topix index headed for its biggest gain in more than seven years, as investors weighed signs shares are oversold and a report showing Japan's economy shrank more than expected last quarter boosted the outlook for central bank stimulus.

The Topix surged 7.2 per cent to 1,282.50 in afternoon trade in Tokyo, heading for its biggest gain since October 2008, after plunging 13 per cent last week. The Nikkei 225 Stock Average gained 6.1 per cent to 15,857.02 as the yen weakened for a second day.

Japanese stocks are looking 'massively oversold', while poor economic data has increased calls for more stimulus. Shizuo Kambayashi

US markets rebounded on Friday to halt the longest losing streak since September. Chinese mainland markets reopen Monday after a week long holiday during which global stocks fell into a bear market.

"Japan is massively oversold," said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. "Everyone is scrambling to get back in. Long-only investors are coming in along with retail and hedge funds. Plus, I would say there's a lot of short covering going on. Also, US shares rallied and we have China's market back on today."

The Topix's 14-day relative strength index fell to 26.49 on Friday, below the level of 30 which some traders say indicates that shares will rise.