"Banks will remain firm because of talk of the bailout," said Paul Muller, a director at Schroders Japan. "But investors will slice one or two blue chips on the strong yen and poor earnings news." The benchmark Nikkei 225 index last week rose 411.59, or 2.48 per cent, to 17,040.06.
The yen hit a three-month low of 122.93 to the US dollar on Thursday on optimism about the pump-priming measures the government has promised to present on 20 February. Bonds are stalled on concern about the impact of the package.
"There's concern that the government will come up with more for the economy," said Hiroshi Sakuma, fixed-income manager at Dai-Ichi Mutual Life Insurance. "For now, we can't buy or sell bonds until we see what the government is going to do."
The yield on the benchmark government bond was unchanged last week at 1.765 per cent. Investors said they were concerned the government could spend an additional 6 trillion yen (pounds 30bn) or more to prop up the sagging economy. That could lead to faster growth and eventually higher interest rates, eroding the value of existing bonds.
"Six trillion could very quickly evolve into 10 or 12 trillion," said Cameron Umetsu, economist at UBS Securities. "It's difficult to buy bonds now."
The Liberal Democratic Party will this month unveil its fourth set of economic measures since October, a day before ministers of the Group of Seven leading industrial nations meet in London.
"The economic package won't surprise the market because it won't include spending," said Akitsugu Bando, portfolio manager at Okasan Capital Management.
The economy's performance is continuing to slide. The Economic Planning Agency on Friday cut its assessment of the economy for a sixth straight month. The EPA said the economy had "stagnated" - the first time it has used that description since January 1975.
"It's clear that regardless of what the government does, we are not going to see a strong recovery," said Mr Umetsu of UBS. "If we go to [yields of] 1.85 to 1.90 per cent, banks and life insurers will be back buying."
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