Japanese shares are expected to rise further this week ahead of a quarterly Bank of Japan sentiment survey that is likely to show companies remain upbeat.
Apart from some concern that the market has risen too far too fast, there are few domestic factors to keep Tokyo shares from moving higher, analysts said.
Recent economic data have reinforced views that Japan's recovery is on track and companies are expected to post a third year of double-digit profit growth.
"The market is set to move higher, but little by little," said Yutaka Shiraki, senior strategist at Mitsubishi Securities.
The Bank of Japan's quarterly "tankan" survey of corporate sentiment on Thursday is expected to show a sharp improvement in companies' assessment of business conditions.
Analysts said Tuesday's industrial production data for May would likely provide more evidence of strength in the economy.
Traders expect the Nikkei average to move between 11,700 and 12,100 this week, putting it within striking distance of a 35-month closing high of 12,163.89 struck on April 26.
The Nikkei rose 3.5 percent last week to 11,780.40, its best close in eight weeks. It has risen over 12 percent since mid-May.
The Dow Jones industrial average fell 0.69 percent on Friday while the Nasdaq index rose 0.49 percent.
Markets have largely factored in a quarter point rise in US interest rates after a Federal Reserve meeting ending Wednesday and traders said the handover of power in Iraq the same day would not be a big issue unless security fears pushed up oil prices.
"If these events come as expected that would spur buying," said Hiroichi Nishi, manager of equity marketing at Nikko Cordial Securities. "I think the Nikkei's 12,000 level is well in sight."
Shiraki, of Mitsubishi Securities, said undervalued blue-chips would be in favour, particularly pharmaceuticals and recently battered high techs.
Nobuki Goto, general manager of investment research at Tokio Marine Asset Management, was more cautious, however. "It looks too risky to buy at the current high price levels," he said.
Some analysts worry that higher US interest rates could curb consumer spending in Japan's main export market and encourage global investors to move away from riskier assets, including Japanese shares, and switch into bonds.
Also, investors may become reluctant to build positions ahead of Japan's July 11 Upper House election.
A Reuters poll of 56 analysts on Friday showed 30 respondents expected the stock market to fall if Prime Minister Junichiro Koizumi's Liberal Democratic Party failed to achieve its target of winning 51 seats out of 121 being contested in the election.
"The market has not taken into account of the election risk yet," said Yoshihisa Okamoto, senior vice president at Fuji Investment Management.
"But a fall in Koizumi's popularity recently means there's a chance the election result will increase political uncertainty."
A strong yen is another concern. Shares of Toyota Motor Corp and those of some other exporters eased on Friday on worries that a strong yen could hit export earnings.
The currency could get a boost if the tankan comes far better than expected, or if geopolitical tensions weigh on the dollar.
A Reuters poll produced a median forecast of plus 17 for the tankan's headline figure, the diffusion index for large manufacturers, up from plus 12 in the March survey.
It would be the highest reading since August 1991.
A Reuters poll on the industrial output data yielded a consensus for a month-on-month rise of 2.5 percent in May, following a 3.5 percent gain in April.
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