"Sentiment from overseas is more optimistic than it has been for 12 months," said Fiachra MacCana, head of research at WestLB Securities Pacific. "There is this pent-up demand, certainly among North American investors, to increase their weightings in Japan."
Investors say the benchmark Nikkei 225 average may approach 15,500, a level untested since early August. Foreign brokerages were net buyers of Japanese shares every day last week, during which the Nikkei rose 1.9 per cent to 15,069.4.
"[Foreign investors] are saying, 'We sold off XYZ stock because we thought the US was going to tank, and we're wrong, it's moving the other way,' " said Mr MacCana. He expects foreign funds to flow back into Japanese companies "that benefit from a strong US economy".
Shares in retailers such as Seven Eleven and other consumer-oriented industries may also rally on expectations the government will cut taxes further to encourage individual spending.
"The government is finally giving the impression that it's listening to the market," said Hitoshi Yajima, director of Tachibana Investment Management. "That's why we were able to get past 15,000." Still, banks and construction companies may lag the market. The country's 18 largest lenders are being criticised for announcing plans to apply for only $47bn (pounds 29bn) of a fund established by the government to replenish their capital.
Government bonds are likely to fall amid expectations the government will sell more bonds to finance tax cuts to boost spending. Last week, the benchmark government yield rose 17.5 basis points to 1.075 per cent.
Fears of an increase in supply grew after the government decided to sell about 10 trillion yen of bonds, more than earlier expectations, to finance its third supplementary budget for this year. Bonds may also fall if the Nikkei 225 stock average stays above 15,000.
"The direction of the bond market may have changed," said Akitsugu Bando at Okasan Capital Management. "Until now, it was able to keep rising because there seemed no hope for stocks. But with the Nikkei seemingly supported at 15,000, the picture may have changed."