The Nikkei closed at 18,003 at the end of the last business year and senior politicians have said they want the market at that level this month to keep banks and companies from posting losses on their equity holdings.
"They've got to get the market up by the end of March, so they may as well start preparing the groundwork now" said Paul Muller, a director at Schroders Japan.
Bonds fell and stocks rose 2 per cent on Friday after officials suggested the government may spend up to 20 trillion yen (pounds 96bn) on new measures to boost the economy. "Expect positive leaks to accelerate from now to the fourth week of March," said Stephen Bronte, managing partner at Stephen Bronte Partners, a three-year old Japanese hedge fund in California. "It's almost a certainty the government will do something - the only question is: Is it a 10, 15 or 20 trillion yen package?"
Bond investors are unenthusiastic at the prospect of higher public spending. "Investors will be bearish because the government is certain to come up with something," said Jun Fukashiro, a fund manager at NCB Investment Management Co.
In the week just ended, the benchmark government bond fell and its yield rose 1.5 basis points to 1.660 per cent. Fukashiro said he recently shortened the average maturity of bonds in his portfolio, expecting the benchmark yield to rise to about 1.8 per cent through March, the end of the business year.
Still, the decline in bonds could be limited by investor expectations the economy will remain sluggish. "The tumble won't continue because economic fundamentals haven't changed," said Hiroshi Uchiyama, fixed income manager at Nikko Securities Investment Trust. "The government measures will merely put a brake on the worsening of the economy."
The Nikkei stock index closed on Friday at 16,831,67, the first close above 16,800 since 12 Feb and the largest percentage gain since 23 Jan. The index, led by banks, builders and retailers, may rise as high as 17,500 this week, traders said.
On Friday, stocks enjoyed their biggest gain in more than a month, led by Nippon Steel Corp, after senior members of the ruling Liberal Democratic Party said the government may inject funds to help avert a recession.
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