The Nikkei finished up 0.7 percent at 19,646.24 after reaching as high as 19,687.99, its loftiest level since Aug. 17. For the month, it slipped 1.4.

"Despite today's gains, the Nikkei could be starting the new month with a relatively heavy tone, after a monthly loss," said Yutaka Miura, a senior technical analyst at Mizuho Securities.

"You can't really say that investors' risk sentiment has recovered, as much of the gains are due to short-covering," he said.

Investors remain nervous about the prospect of a U.S. government shutdown, and a potential debt default if lawmakers don't raise the nation's debt ceiling by the end of September.

While North Korea's arms development remains a threat, some of the alarm raised by regional tensions following its latest missile test moderated.

"Extreme fears about North Korea have receded," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center.

The Nikkei Volatility Index, which rose 2.5 percent to 15.14 on Thursday, spiked to a one-week high of 16.32 on Tuesday after North Korea fired a ballistic missile over Japan's northern Hokkaido island into the sea.

On Thursday, Japanese exporters benefited from a weaker yen, as the dollar gained on strong U.S. gross domestic product data and U.S. private-sector employers that bolstered expectations for a solid U.S. jobs report later this week.

Subaru Corp rose 0.6 percent, Honda Motor Co gained 1.4 percent, and Hitachi Ltd soared 1.7 percent.

Daiichi Sankyo Co shares soared as much as 13 percent and was up 5.3 percent before trading was suspended, after a business magazine reported that Britain's AstraZeneca offered to buy Japanese drugmaker last year. The online version of Nikkei Business magazine, citing unidentified sources, said Daiichi Sankyo declined the offer.

Banking stocks gained, with the Tokyo Stock Exchange banking sub-index up 1.5 percent. Mitsubishi UFJ Financial Group rose 2.1 percent and Sumitomo Mitsui Financial Group was up 2 percent.

Meanwhile, Fujifilm Holdings rose as much as 4 percent after it said on Wednesday it would buy back up to 16 million of its shares, representing 3.7 percent of total outstanding, for up to 50 billion yen.

The broader Topix gained 0.6 percent to 1,617.41. (Editing by Jacqueline Wong)