(REUTERS) -- Japan's Nikkei share average ended nearly flat on Tuesday, but logged its best January performance in 13 years as investors remained optimistic that the U.S. economic recovery could offset disappointing domestic corporate earnings.

It gained 4.1 percent in January, much better than its average of 1.37 percent for the month between 1972 and 2011.

A lot of people call this is short-covering or month-end window dressing, but the market is definitely in an upward trend, said Yoshihiro Ito, chief strategist at Okasan Online Strategies.

The fact that Portugal's bond yields rose and reports that Greek talks are facing difficulties is nothing new and it's not a reason to sell. It's all a matter of market sentiment -- investors remain hung-up on Europe, but now is not the time to take a wait-and-see approach, he said.

On Tuesday, the Nikkei edged up 0.1 percent to 8,802.51, ending a three-day losing streak. The broader Topix eased 0.2 percent to 755.27, weighed down by shares of companies that reported weaker-than-expected results.

A Reuters poll showed that while Japanese fund managers cut their global stock weighting in January as worries about Europe persisted, they raised their weighting for Japanese stocks to a seven-year high on the view they are relatively undervalued.

There is a feeling among market players of exhaustion of bearishness. A lot of (Japanese) stocks are undervalued. A lot of Europe's pessimism has been priced in, said Naomi Fink, head of Japan strategy at Jefferies Japan.

Meanwhile, you see some slightly better data out of the U.S., so there is an incipient signal of recovery of the U.S. For Japan, that means an incipient signal of recovery of overseas demand.

Trading volume increased on Tuesday, with 2.07 billion shares changing hands on the main board, up from 1.65 billion shares on Monday.

EARNINGS DISAPPOINT

Blue chips Canon Inc. and Fujifilm Holdings disappointed investors with weak quarterly earnings and profit warnings.

Shares of Canon, a $60 billion camera and printer maker, dropped 4.2 percent to be the top weighted loser on the Nikkei after it forecast weaker-than-expected earnings growth for 2012, citing worries over a slowing global economy and a strong yen. The company also announced that its president was stepping down.

Fujifilm Holdings tumbled 6.9 percent after it cut its annual operating profit forecast by 19 percent and net profit estimate by 48 percent.

Toshiba Corp. also came under pressure and ended down 1.8 percent on a report that it could see operating profit decline 10 percent for the year to March.

After the bell, Toshiba, Japan's biggest chipmaker, slashed its operating profit outlook by a third to 200 billion yen, down 17 percent on the year. Its shares trading in Frankfurt were down 2.1 percent.

Honda Motor Co. also forecast after the market close a worse-than-expected 65 percent drop in profit for the year to March, blaming natural disasters in Japan and Thailand, and the strong yen.

The numbers aren't great but most the of the guys who bought it are long-term guys. We will see how it goes, a trader at a foreign bank said. Honda shares ended 0.6 percent lower.

According to Thomson Reuters StarMine data, out of the 18 Nikkei companies that have reported quarterly figures, 61 percent of them came in below market expectations. That compared with 36 percent of the S&P 500 companies.

Bucking the trend was Sumitomo Mitsui Financial Group, which gained 1.5 percent after it posted third-quarter earnings, which Morgan Stanley described as stable earnings in a difficult environment.

Mizuho Financial Group was flat ahead of its earnings announcements after the close.

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