TOKYO: Asian stock markets edged higher in tepid trading Monday after the world's biggest economy shrank less than expected in the second quarter and banks rose on improving earnings.

Underpinning the modest gains was a U.S. government report Friday that showed the contraction in the U.S. economy slowed to 1 percent in the second quarter, adding to hopes the recession is nearly over. The data also beat expectations with analysts forecasting a 1.5 percent drop.

Banks led the region's rise following better-than-expected earnings from some big lenders and on optimism that financial institutions are bouncing back from the financial crisis.

Japan's market bucked the regional trend despite the rally in financial stocks with the benchmark Nikkei 225 stock average down 11.31, or 0.1 percent, to 10,345.52 while Hong Kong's Hang Seng rose 128.26, or 0.6 percent, to 20,701.59.

Elsewhere, South Korea's Kospi gained 0.6 percent, Australia's benchmark advanced 0.8 percent and China's Shanghai market was up 1.3 percent. Taiwan's market dropped 0.4 percent.

"Hopes for good earnings has been driving stocks higher," said Motomi Hiratsuka, head of sales trading at BNP Paribas in Tokyo. "It looks like corporate restructuring efforts are paying off. But it remains to be seen whether companies can start expanding profits now."

Fueling the momentum among Japanese banks was Mitsubishi UFJ Financial Group Inc., which shot up 4.4 percent. Japan's biggest bank reported Friday that its net profit for the April-June quarter surged 48 percent from a year earlier to 75.9 billion yen ($798 million).

Its two main rivals also rose, with Sumitomo Mitsui Financial Group Inc. climbing 2.2 percent and Mizuho Financial Group Inc. up 2.8 percent.

In Hong Kong, investors bought HSBC Holdings Plc on hopes of good news when the banking giant releases earnings after market close. Its share rose 1.1 percent while Bank of China Ltd. was 0.5 percent higher.

"For HSBC, the expectation is that the worst is over," said Francis Lun, general manager at Fullbright Securities in Hong Kong.

Australian financial issues also rose after Goldman Sachs JBWere raised its ratings on several major banks. National Australia Bank Ltd. rose 2.8 percent and Westpac Banking Corp. jumped 3.3 percent.

Among other strong performers, Japan's Nissan Motor Co. rose 5.8 percent after the automaker unveiled its new zero-emission vehicle on Sunday. The "Leaf" hatchback is set to go on sale in Japan, the U.S. and Europe next year.

Before the weekend, traders used the brighter news about the U.S. economy to give the Dow Jones industrials its best July in 20 years.

The Dow rose 17.15 points, or 0.2 percent, to 9,171.61 and the Standard & Poor's 500 index gained 0.73, or 0.1 percent, to 987.48. Stock futures pointed to slight gains Monday on Wall Street with Dow futures up 4 points at 9,130.

Oil prices jumped above $70 a barrel in Asia on investor expectations a recovering global economy will boost crude demand. Benchmark crude for September delivery was up 67 cents to $70.12 a barrel by midday Singapore time in electronic trading on the New York Mercantile Exchange. On Friday, the contract rose $2.51 to settle at $69.45.

In currencies, the dollar held steady at 94.72 yen. The euro slipped to $1.4239 from $1.4270 late Friday.