The IBJ, DKB and Fuji Bank "merger is a substantially significant development. It accelerates the pace of bank restructuring, and you shouldn't underestimate the benefits it would have on the economy", said Darrel Whitten, strategist at ABN Amro Securities. "The merger provides a good counter to the effects of the yen."
On Thursday, Mr Whitten raised the weighting of Japanese stocks he recommends in a global portfolio to 16 per cent, from 15 per cent. He thinks the Nikkei will rise to 20,000 points by March.
The benchmark Nikkei 225 index soared 1.2 per cent on Friday to close above 18,000 points, while the Topix banking sub-index advanced 10 per cent, its biggest gain in 14 months.
IBJ, Fuji and DKB plan to merge their wholesale, retail, securities and investment banking units by early 2002, creating the world's first financial group with more than $1bn (pounds 588m) in assets. All three banks were untraded on a glut of buy bids and investors expect them to rise further on foreign demand.
"Foreigners are still underweight on Japan, and especially underweight in the banking sector," an analyst said. "The sector could rise 30-50 per cent."
The Nikkei rose four days last week, climbing 3.8 per cent, even though the yen climbed every day in the week, rising as much as 4.5 per cent to 110.80.
The strength of the yen could weigh on electronics issues and other exporters, many of whose overseas earnings come under threat when the yen rises.
The US Federal Open Market Committee meets on Tuesday to discuss the direction of its interest rate policy. Most of Wall Street's biggest bond firms think the Federal Reserve is likely to raise interest rates 0.25 per cent, though that may be the last such move of the year.
Still, ABN Amro's Whitten thinks that if the dollar continues to weaken, it will increase inflationary pressures within the US economy, making further rate rises more likely.