"The focus is still on the yen," said Takashi Miyazaki, a strategist at Partners Asset Management. "If earnings of electronics industry are hurt by the strong yen, it may delay the country's economic recovery."
Last week, the Nikkei 225 average rose 1.8 per cent to 17,861.86 points. Mr Miyazaki expects the Nikkei will trade between 17,000 and 18,000 this week.
Last Thursday, the dollar fell to its lowest level in five months against the yen, dipping as low as 114.90 after US stocks fell on concern higher labour costs will prompt the Federal Reserve to raise interest rates. Some investors expect the dollar to get weaker if US stocks continue their slide if more economic indicators signal a possible increase in interest rates.
Each one-yen fall in the value of the dollar means large exporters lose several billion yen in operating profit. Sony relies on US sales for one-third of its operating profit.
Some investors are concerned the yen's gain may encourage foreign investors to lock in gains on shares such as Sony, which rose to records earlier this month. "There is a concern that buying from foreign investors is decreasing," said Takashi Otsubo, at Fuji Investment Management, adding that the fall in the Nikkei may be limited as fund managers are expected to continue looking for a chance to invest, Mr Otsubo said.
Japanese bonds are likely to rise as a strong yen will boost the allure of fixed-income securities. "A strong yen is the biggest factor to support bonds," said Masahiro Kami, fund manager at Daiwa SB Investments, as it boosts confidence the central bank will keep rates close to zero as a way to kick-start the economy.
On Friday, the 10-year bond yield fell two basis points to 1.785 per cent. Mr Kami said he expects the benchmark yield to fall to 1.6 per cent in a few weeks.
Analysts were sanguine about the outlook for bonds after Japan's unemployment rate rose to a higher than expected 4.9 per cent in June from 4.6 per cent in May. "It's impossible for the central bank to drop its zero-rate policy unless the unemployment rate peaks out," an analyst said.Reuse content