Tokyo stocks surged Monday, lifting the 225-issue Nikkei average to its highest closing since Aug. 16 on Friday's jump in U.S. stocks and the failure of midsize contractor Sato Kogyo Co., which spurred hope banks are seriously tackling their bad loans.

The 225-issue Nikkei soared 638.22 points, or 5.9 percent, to finish the day at a high of 11,450.22, the first it has closed over 11,000 since Nov. 26.

The broader Tokyo Stock Price Index of all first-section issues jumped 48.87 points, or 4.74 percent, to hit 1,079.04, the first time it has cleared the 1,050 line since Jan. 7.

"In the first place, I think Japanese stock prices have been too low -- it is natural for stock prices to rise," Chief Cabinet Secretary Yasuo Fukuda said at a news conference. "The package of the government's antideflation measures, the Bank of Japan's decision to further ease credit, and expectations that the disposal of bad loans at banks will be implemented steadily helped the surge."

Prime Minister Junichiro Koizumi was also pleased. "Of course it's better when they are higher than lower," he said, setting up his punch line: " If stock prices are to rise when my approval ratings fall, I would be happy to see my approval ratings nosedive further."

High-tech issues led the technology-sensitive Nikkei as investors were encouraged by rising hopes of an economic recovery in the United States.

Bank issues also climbed as investors welcomed Sato Kogyo's bankruptcy filing Sunday. The company's failure was seen as a sign that banks are cracking down on their bad-loan problems and moving toward a solution, brokers said.

"Market players evaluated the failure of Sato Kogyo as progress in structural reforms," Nishi said. "But if such moves don't continue, I think (the market) will lose all that it has gained."

Mizuho Holdings, which includes Sato Kogyo's main creditor, Dai-Ichi Kangyo Bank, climbed 37,000 yen to 297,000 yen.

Meanwhile, shares of low-priced construction companies were dumped as investors confirmed that the business environment for debt-saddled firms is still severe, brokers said.