"Foreigners want to move out of the blue chips and into stocks which are not so affected by the strength of the yen," said Garry Evans, strategist at HSBC Securities.
The two largest Japanese indices were little changed last week, with the benchmark Nikkei 225 ending 30 yen higher than last Friday at 17,629.99. The Topix index ended 19 yen higher.
"The market's waiting for bank mergers, but with nothing concrete there they're running after smaller-capped stocks," said Paul Migliorato, a senior salesman at Commerz Securities (Japan).
Foreign investors are expected to continue to put money into Japan. The threat of higher rates in the US could make Japan a more attractive place to invest and limit falls in the benchmark index. Yet, if more foreign funds come into Japan, it will boost the value of the yen. Analysts at HSBC Holdings said they expect the yen to be worth about 100 per dollar next year, after initially forecasting a rate of 125 yen to the dollar. HSBC has also forecast that the yen will average 105 to the dollar between next month and March next year, while Japanese companies have based their full-year earnings forecasts on an average rate of 114.1.
The government will release GDP figures for April-June on Thursday. The economy probably contracted 0.3 per cent in that quarter from the quarter before, though that would mean GDP rose 0.5 per cent from the year before. The benchmark average soared 8.3 per cent to a 22-month high of 18,532 after the government said on 10 June that first-quarter GDP rose 1.9 per cent from the quarter before. Investors will watch the figures on Thursday for further signs that the economy is recovering.
Investors will also pay attention to the results of the Ministry of Finance second-quarter survey of corporate enterprises, which gives companies' estimates for sales and profits during that period.
The figure is closely related to GDP and many economists said they will revise up GDP forecasts if the figure is better than expected when released on Tuesday.