The Tokyo Stock Exchange ended the year on Dec. 28 on a happy note, with the Nikkei-225 index closing at a 21-month high of 10,395.18.
Investors responded to the falling yen and pledges of stimulus spending by the new government.
But experts are divided over whether such sentiment will persist.
“Due to expectations of monetary easing, shares will continue to rise until the new governor of the Bank of Japan is decided next spring," said Hiromichi Tamura, an economist with Nomura Securities Co.
Many experts expect the Nikkei average to reach about 11,000 by next spring and 13,000 by the end of next year.
However, at least one major securities company remains skeptical.
"The current rise in stock prices is supported by overseas hedge funds that are trying to make a quick profit through short-term buying and selling," a representative said.
For prices to stabilize at their high level, the market needs domestic investors and overseas long-term investors, such as pension funds, to return. It remains unclear whether those investors are ready to resume the wholesale buying of Japanese stock.
"Many investors think they won't be too late to the party if they hold off for now—and wait to see what policies the Abe government actually enacts," said an executive of one middle-ranking securities company.
Whatever happens to the U.S. and European economies will have an impact, too.
The immediate hurdle is whether the United States can solve its fiscal cliff.
But other wildcards are general elections in Italy in February, and in Germany in September. If opponents to fiscal austerity gain more seats in parliament—or if public sentiment turns in a similar direction—worries will increase in the markets.
"There is a possibility that (continuing anxiety) will lead to market adjustments," said Ryota Sakagami, an economist at SMBC Nikko Securities Inc.
Meanwhile, the yen has been softening significantly against major world currencies.
"Expectations on the Abe government will shrink someday. I think that the yen will hover in the range between 85 yen and 90 yen against the dollar next year," said Teppei Ino, an economist with the Bank of Tokyo-Mitsubishi UFJ.
And holders of government bonds may decide to sell amid expectations that the Abe government's stimulus spending will deepen government debt.
Some experts forecast long-term government bond interest rates to rise to about 1.2 percent in 2013.
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