Optimism is spreading rapidly throughout the Tokyo stock market. With the key Nikkei average having reclaimed 11,000, a level unseen for months, market players believe they have, for now, established the downside of the market.

There are two key reasons for the latest developments. The first is the narrowing gap in perspective between the market and the government. Specifically, the market previously did not fully trust the government's approach to tackling the nation's economic and financial woes.

The government had originally maintained that giving banks an additional injection of public funds was unnecessary, brushing aside the market's view that banks will need more public cash to cover capital shortages that are expected to mount as the assessment of bad loans under tougher criteria force them to sharply build up their loan-loss reserves.

Major banking stocks thus remained under accelerating downward pressure. But recently, the government has talked openly of using public funds to bolster banks' weakened capital bases.

The second reason for the change is the tough government stance on short selling.

While short sales have decreased as a result of new, stringent regulations, purchases by public pension funds and other players are now effectively pushing up stock prices.

The outstanding balance of stocks sold short now tops 1 trillion yen. The new controls on short sales are naturally aimed at prompting investors with short positions to scramble for massive purchases, providing strong support for a market rally.

Once the stock market bottoms out, it usually seeks a second bottom within six months. Occasionally, it even hits a third bottom. This pattern was typically seen when the market bottomed out in October 1998.

It is premature to say, however, that the market will evidence the same pattern this time, as there are numerous uncertainties affecting it, including economic activity and stock trends in the U.S. and ominous portents in Japan, such as aggravated deflation, an increase in bad loans held by banks and a plunge in government bond prices.

Investors for now thus need to check the market downside from time to time.