"The key factor will be Asia," says Pelham Smithers, a strategist at ING Baring Securities (Japan). "The position in Indonesia doesn't appear to be able to last seven days without a major step being taken."
The Indonesian rupiah plunged for a seventh day on Friday, falling 20 per cent against the dollar as several banks froze lending.
The Nikkei 225 index is likely to trade between 16,300 and 17,300 this week, traders say. The index gained 4.6 per cent last week to close at 16,789.11.
Supporting stocks and hurting bonds last week were hints from officials that Japan will drop its commitment to fiscal reform in favour of stoking the economy. Suggestions include higher spending on infrastructure and more income tax cuts.
"There's a significant amount of pressure on Japan to do something to boost domestic demand," says Cameron Umetsu, senior economist at UBS Securities. "It's no longer a question of if, but of what magnitude." Bond yields are likely to rise further in the days ahead, he said.
Last week the benchmark government bond yield, maturing in September 2005, rose 16 basis points to 1.805 per cent, its highest since 13 October.
More stimulus steps could be drawn up by 20 February, said a senior legislator in the ruling Liberal Democratic Party. The government's goal is to push the Nikkei back to 18,000, its level on 31 March, 1997. Some economists say the new measures may have limited impact, but the government is keen to boost the value of banks' stock portfolios.
Investors and traders are confident that the weak economy will keep interest rates low.
Economic indicators out in the week ahead aren't likely to alter the view that the economy is struggling, and will probably not influence bonds much. Last month's supermarket and department store sales figures are released on Monday. In November, supermarket sales fell 4.5 per cent on the month a year earlier, while department store sales fell 3.5 per cent.
The market is awaiting Thursday's release of December industrial production figures. Production is expected to have risen 1.3 per cent last month, after falling 5 per cent in November from October.
On Friday the government is expected to report that Japan's unemployment rate has risen to 3.6 per cent, a post-war high.
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