"If the government changes its policy, it may have to issue more bonds. I'm worried about that," said Yoshihiro Ishii, fund manager at Asahi Life Investment Management.
The business year ends on 31 March and the government has been keen to pull the stock market to 18,003, the level at which it closed last year, to keep banks and life insurers from posting valuation losses on their equity holdings. Banks will likely lead the expected fall in the second half of the week.
Politicians have pledged to use up to 1 trillion yen ($7.7 billion) of postal savings and insurance money to pump up the market.
"Managers probably already have the one trillion yen," said Alexander Kinmont, strategist at Morgan Stanley Japan. "If the market showed a great sign of falling, it's probable that they would spend quite aggressively."
The benchmark Nikkei stock average fell 0.54 per cent to 16,830.47 last week. It may rise as high as 17,500 by Tuesday, but will fall at least 500 points after that, said Kiyoshi Tsugawa, chairman of Lehman Brothers Japan.
"All investors are quite nervous about the movement in the market after the [31 March] crucial point," he said. "When they look at fundamentals there are more negative signs than positive."
In the bond market the benchmark government bond fell last week, driving its yield up to 1.615 per cent, its highest in three weeks.
The main event this week, the release on Thursday of the Bank of Japan's widely watched "tankan" survey of business sentiment, could be a double- edged sword for bonds. The tankan is likely to show a marked worsening in sentiment since December. While that will give the central bank further reason to keep interest rates at record lows, "a weak tankan could lead to new government measures" and won't be a reason to buy bonds, one analyst said.
Prime Minister Ryutaro Hashimoto and the ruling Liberal Democratic Party will next month consider cutting taxes, which could require issuing more bonds to make up for lost revenue. That could push prices down and drive yields up. Losses may be limited by doubts that government action will help right away. Equities are not seen as an attractive alternative, with the Nikkei index 8 per cent below a year ago.
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