Tokyo market: Shares are on a high - and getting higher

JAPANESE stocks are likely to rise further after hitting a 22- month high last week - driven by demand from both domestic and overseas buyers. Bonds are likely to fall as a better economic outlook could weaken demand for a sale of 10-year bonds.

"Global portfolio managers still see Japanese stocks as having some room to rise because of the positive earnings outlook," said Hajime Yagi, fund manager at Meiji Dresdner. The Nikkei 225 average, which gained for a seventh straight week, and closed at 18,248.30, may trade between 18,000 and 18,700 this week.

However, the recent gains in the Nikkei have shaken investor confidence about buying new 10-year bonds at a $11.58bn (pounds 7.42bn) auction next Thursday. "Bonds won't be a core part of portfolios any more, given strong stocks," said Shingo Takenaka, a manger at Sanwa Bank.

Investors are likely to focus on electronics makers, such as Sony, and telecommunications companies, such as Nippon, which investors see as having the most growth potential. Electronics stocks could also be encouraged by positive earnings reports from their US counterparts. Yet, the Nikkei's gains may be capped by selling by investors who are still concerned about the state of the economy. Some may take advantage of the rally to unload long-held shares and lock in recent gains. "The focus on electronics issues implies that investors are not convinced enough to buy domestic issues," said Mr Yagi at Meiji Dresdner. He expects more positive economic news is needed for the Nikkei to trade above 19,000.

The bond market is soggy after the fall of the benchmark 10-year bond last week, which pushed the yield up eight basis points to 1.745 per cent. During the past month, bonds maturing in 10 years and longer have lost 0.96 per cent, while the Nikkei 225 has gained 6 per cent. Traders tend to sell bonds before an auction to raise the coupon of new issues and drum up demand. "If the coupon is 1.6 per cent, that won't attract anybody," said Mr Takenaka. "Even if it's 1.7 per cent, that may struggle to find buyers."

Japan's money supply growth also supported a positive economic outlook. Money supply rose for a fourth month in June, because overnight call rates near zero spurred a surge in bank deposits as investors chased better returns. Yet the economic outlook isn't rosy enough to have altered the central bank's tack of keeping the overnight lending rate near zero to maintain the pace of recovery.