Foreign fund managers, who have been net buyers of Japanese stocks for eight straight weeks, are betting on dividends from the combination of government steps to speed economic recovery plus companies' efforts to raise profitability.
Finance Minister, Kiichi Miyazawa, said the Japanese government plans to revamp its latest economic stimulus programme by moving forward public- works projects and relaxing credit conditions for home buyers and small businesses.
Bonds are likely to rise as the Bank of Japan is expected to keep supplying ample funds to the banking system to keep the overnight lending rate between banks close to zero. This would make it easier for investors to raise funds to buy bonds.
"It's obvious the government will watch interest rates so as not to let them rise," said Jun Fukashiro, a fund manager at NCB Investment Management. Last week the yield on the benchmark bond fell 5 basis points to 1.665 per cent. The benchmark yield has fallen more than 70 basis points from its high of 2.44 per cent in February.
The Nikkei index, which last week rose almost 6 per cent to 16,378.78, may climb past 16,500 as the fiscal year end on 31 March approaches. "My impression is that a lot of foreign funds still haven't finished rebuilding their Japanese portfolios," said Shoji Hirakawa, strategist at Kokusai Securities. "What is certain is that the government is doing everything it can to lead the market above its closing level last year."
The Nikkei finished at 16,527.17 last 31 March. Hirakawa suggested that the timing of measures by the government and the central bank point to an attempt by authorities to support the market, minimising paper losses recorded by banks and other institutions on their investment portfolios.
The benchmark probably won't rise far above 16,500 this month, though, as corporate shareholders are looking for opportunities to take profits before they close their books.
Part of the credit for the Nikkei's biggest rally this year goes to Sony., which unveiled its new PlayStation video game and announced plans to reorganise its slumping electronics business around the hit product.