The Nikkei stock average advanced on Friday, bolstered by gains in artificial intelligence (AI) related shares. Japanese government bonds and the yen also strengthened, supported by potential shifts in the investment strategy of the nation's large pension funds.

The Nikkei 225 index closed 1.2% higher at 68,557.73, after having risen as much as 2.4% during the session. The broader Topix index edged up 0.39% to finish at 4,036.08.

The yield on the benchmark 10-year Japanese government bond fell 11.5 basis points to 2.76%, retreating from a three-decade high. The yen appreciated 0.5% against the U.S. dollar to 161.550.

Wall Street technology shares posted strong gains overnight after chipmaker Micron Technology announced plans to invest over $250 billion in the United States by 2035.

"Japanese stocks are being lifted by the overnight rally in U.S. tech shares," said Shuutarou Yasuda, a market analyst at Tokai Tokyo Intelligence Laboratory. Kazuaki Shimada, chief strategist at IwaiCosmo Securities, noted that the Nikkei's early gains moderated as the rally in South Korea's benchmark KOSPI index narrowed.

Chip-related stocks were among the top performers on the Nikkei. Shin-Etsu Chemical surged 15.40% to its daily limit of 5,244 yen.

The technology investment group SoftBank Group Corp rose 10.65%, while chip testing equipment maker Advantest Corp gained 2.3%.

The rally in bonds and the yen was fueled by remarks from Finance Minister Masato Kanda, who stated the government would explore measures to encourage pension funds, including the Government Pension Investment Fund (GPIF), to increase their investments in domestic financial assets.

Expectations that Japan's largest pension fund could allocate more capital to the domestic market improved sentiment for both bonds and the yen, assets that have faced persistent pressure in recent years.

"Minister Kanda's comments helped reverse the selling trend in Japanese government bonds and the yen," said Masahito Sugawara, senior strategist at Daiwa Securities. "Currently, Japanese pension funds have about half their assets invested overseas. The market is betting that a potential shift in asset allocation would be favorable for Japanese assets."

Miki Den, senior Japan rates strategist at SMBC Nikko Securities, noted that yields extended their decline later in the trading session as foreign investors bought Japanese bonds to cover short positions following the opening of European markets.

Shares of Fast Retailing Co Ltd closed down 3.59%, marking their largest single-day decline since May 12.