Japanese shares are expected to benefit next week from optimism over local companies and lower expectations of imminent interest rate hikes but US economic data could cloud the picture, dealers said Friday.
For the week to December 1, the Tokyo Stock Exchange's benchmark Nikkei-225 index rallied 578.18 points or 3.67 percent to 16,321.78. The broader TOPIX index on all first section stocks improved 66.86 points or 4.35 percent to 1,604.90.
"For now, buying sentiment looks likely to remain strong for at least the rest of the year as players are seen to continue buying shares in key industries such as steel-makers, which will have a positive impact on the entire market," said Kenichi Azuma, senior analyst at Cosmo Securities.
However, gains will be limited due to lingering uncertainty over the US economy's health, dealers said.
"Shares will be comparatively robust but won't move as much as they did this week because we'll have to see how the stock market in the US performs," said Toshihiro Matsuno, research head at SMBC Friend Securities. A batch of US and Japanese economic indicators ruffled share prices this week.
A larger-than-expected upward revision of third quarter US growth gave a boost to US shares but a cooling housing market then left investors queasy.
"If the US housing starts continue to slide against our expectations, this will overshadow the US economy and eventually the Japanese economy. We need to keep an eye on that, said Azuma.
Japan on Friday reported a mixed batch of economic data including weaker-than-expected inflation that reduced expectations of an interest rate hike this month.
"Weak consumer consumption and household spending has crystallised expectations that the Bank of Japan will very likely not raise interest rates this month, as it had previously alluded to," said SMBC Friend Securities' Matsuno.
Dealers expect the market to trade in a range of 16,100 to 16,600 points next week, with investors looking corporate statistics on Monday that will reveal whether companies are continuing to increase capital spending.
Looking beyond next week, market participants are waiting for the key Tankan business sentiment survey out December 15 for clues on the direction of interest rates.
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