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The yen has suddenly begun surging on the world currency market, hitting a five-month high of just over 125 to the dollar.

Apparently behind the yen’s strong showing was Friday’s upbeat economic report that the Japanese economy has bottomed out.

Institutional investors vying for leadership in management of investment funds have reacted positively to the report.

Another official report, due out June 7, is expected to show that Japan’s gross domestic product is outpacing the U.S. economic expansion.

Japanese and overseas institutional investors now appear to be opting to increase Japan’s weighting in their global stock portfolios at the expense of the United States, amid concern over the slower-than-expected U.S. economic recovery.

The government is signaling to the market that it intends to map out a second package of measures to fight deflation next month.

Expectations are now running high for positive policy measures ahead of a meeting of financial leaders from the Group of Seven nations set for June 14 in Halifax, Nova Scotia, and a Group of Eight summit set for June 26 in Kananaskis, Alberta.

Against this backdrop, Japanese equities could stay in vogue in the near term, keeping the yen afloat between 123 and 126 to the dollar.

The market then would begin guarding against intervention by Japanese monetary authorities.

With the G7 meeting drawing near, however, intervention, if any, could remain low-key, unless the yen threatens to strengthen beyond a range between 119 and 122.

It is widely feared, however, that the Japanese economic recovery, fueled by an economic pickup in Asia and the U.S. and increased Japanese export shipments, could prove to be patchy.

The government’s hasty conclusion that the economy has bottomed out and investors’ overly enthusiastic reaction may backfire.

Developments on the domestic markets in the coming months depend largely on the government’s resolve to push for tax reforms and policy measures to keep the nation from sliding into a deflationary spiral.

The ball is in the government’s court.

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