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The shift among investors toward Japanese stocks — the primary catalyst for the yen’s rise in recent weeks — has helped drive the Nikkei average back above the key 11,000 level.

The 225-issue Nikkei average closed Tuesday at 11,792.44, a striking increase from last month when it languished below 9,500.

Both domestic and foreign institutional investors piled into the Tokyo stock market shortly after the government unveiled a package of measures to fight deflation late last month.

The yen has given up much of its recent gains, however, and is now hovering around 131 to the dollar, down from around 128 earlier this month.

The government’s maneuver to provide a floor for the falling stock market has helped improve investor sentiment.

Investors have also reacted positively to the government’s announcement that it will take steps to keep share prices afloat in general and maintain tighter controls on short selling in particular.

The sudden rise in Tokyo share prices has prompted foreign institutional investors to adjust their oversold Japanese portfolios. Some also believe the long-feared March crisis has been averted.

Investors have taken heart from the government’s stated intention to follow up its recent antideflation package with more concrete steps.

There is speculation that Prime Minister Junichiro Koizumi, with an eye on the falling public approval ratings for his administration, will adopt a policy shift in favor of pump-priming measures.

The market is now looking for clues as to whether the government will opt to make public next month the results of its special inspections of banks and give a formal go-ahead for further injections of public funds into banks.

Investors are also starting to count on the arrival of bold tax reforms, including a relaxation of the gift tax in relation to home purchases. If the expectations materialize, the yen could surge and move to around 125 to the dollar.

Should the government fail to live up to these expectations, however, much of the current uptrend in share prices will run out of steam.

Investors will then begin fretting about a September crisis, sending share prices reeling. The yen could then weaken to 135.

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