Sony, Fuji Photo Film and other companies that rely on US sales are set to gain amid waning concern that a stronger Japanese currency will squeeze overseas earnings. The dollar rose to a three-week high of Y123.43 on Thursday as the Bank of Japan pumped in money, pushing down government bond yields.
While the benchmark Nikkei 225 index rose 3.6 per cent last week - rescued by a 5 per cent gain on Friday alone - the market may be held back in coming days by banks. The end of the Japanese fiscal year on 31 March is ratcheting up pressure on banks to cash in long-held stocks to offset extraordinary losses incurred in part as they restructure money-losing operations.
"You've got foreign investors starting to feel uncomfortable about Japan being so underweight in their portfolio," said Yoshio Inamura, a portfolio manager at Tokyo-Mitsubishi Asset Management, which manages Y20bn (pounds 101m). "On the other hand, domestic institutions are still looking for chances to sell before book closing."
The Nikkei is likely to move between 14,500 and 15,500, Inamura predicted. He expects trading to be volatile because next Friday is settlement day for March Nikkei futures and options contracts, and during the run-up investors will try to push the benchmark in line with their positions.
The broader Topix index of all shares on the first section of the Tokyo Stock Exchange gained 2.4 per cent to 1146.72. The prospect of a weakening yen and falling interest rates helping Japan's struggling economy may encourage investors to take another look at Japanese stocks. Also improving sentiment is news that Sony and Toshiba are working together to produce cutting-edge microchips.
Sony, which last week unveiled the successor to its best-selling PlayStation video game, said it will form a joint venture with Toshiba to make the high-performance chips that will power the new machine.
Falling yields on government bonds may spur buying of utilities such as Tokyo Electric Power that typically offer high dividend returns. At 1.99 per cent, Tokyo Electric's dividend yield is higher than the yield on the benchmark government bond, which Friday fell to 1.56 per cent. Investors looking for protection from earnings revisions will seek safety in drug makers and telecommunications companies.