Tokyo stocks have surged over the past 2½ months, propelled to their highest in 33 months by monetary and fiscal stimulus measures being advocated by Prime Minister Shinzo Abe and receding jitters over the global economy.

While many market analysts predict the Tokyo market has more room to rise, some express caution against too much optimism because of risks from both domestic and international events in the coming months.

Since mid-November, the benchmark 225-issue Nikkei index has surged about 29 percent to over 11,100 points, attracting money from both foreign and individual investors, with daily trading value doubling to about ¥2 trillion from levels earlier in the year on the first section of the Tokyo Stock Exchange.

The rally came in tandem with the dollar’s appreciation from the upper ¥79 range to the lower ¥92 level, with the weaker yen brightening the earnings outlooks of major companies, especially large exporters.

Strong expectations for the new prime minister’s policies, dubbed “Abenomics,” and easing concerns about the eurozone debt crisis as well as growing signs of a U.S. economic recovery, have also been major factors, analysts say.

“The upward momentum does not seem to be halting. Stocks can chase even higher ground if we see more developments in economic policies under Abe,” said Masatoshi Sato, chief strategist at Mizuho Securities Co.

As for domestic trading leads, Sato said investors have so far been buying on expectations of progress in halting deflation rather than on the Abe administration’s pledge to pursue full-fledged reform.

If actual progress is made on deflation and more steps are taken on the political front, the stock market will likely build momentum, according to Sato.

“Until the Upper House election slated for summer, the government is expected to do all it can to meet market expectations,” said Yuji Saito, director of foreign exchange at Credit Agricole Corporate & Investment Bank in Tokyo, noting the dollar is likely to test the ¥95 mark in about half a year.

Because stocks have following the movements of the currency market, several analysts said the Nikkei could test the 12,000 mark if the dollar hits the ¥95 line.

The government and the Bank of Japan last month issued a joint statement, urging the central bank to pursue more aggressive monetary easing and set a 2 percent inflation target.

To shore up the economy, the government recently decided to boost spending on public works projects and made sounds about possible tax breaks for companies that hike wages.

The government’s policy agreement with the BOJ and the spending plans in the fiscal 2013 national budget have drawn positive reactions from stock investors.

As for incentives from abroad, recent overseas developments have largely given more impetus to Tokyo stocks. The earlier than expected repayment of funds from banks to the European Central Bank as well as a steady recovery of the U.S. housing market have fueled risk appetite, accelerating the flow of investment money from the relatively safer bond markets to riskier equities, they said.

Some analysts, however, warn that investors seem to be ignoring potential risks at a time when fiscal issues in the United States and the eurozone, for instance, haven’t been resolved.

If negotiations in the U.S. Congress falter when the temporary raising of the debt ceiling expires, the stampede into the dollar could reverse and bode ill for Tokyo stocks, they said.

The selection of the next Bank of Japan governor as well as the Group of 20 meeting of finance ministers and central bank governors in Moscow, both in February, might also be factors that need to be carefully watched, they added.

“If there are remarks warning of excessive weakness in the yen at the Group of 20 meeting, that might send the dollar lower against the yen,” said Minori Uchida, Tokyo head of global market research at the Bank of Tokyo-Mitsubishi UFJ.

In January, a slew of comments both for and against a yen weakening have jolted currency trading and consequently Tokyo stocks.

Analysts said that if the selection of the BOJ governor and future monetary policies fail to meet expectations, the tide could change.

“We also have to carefully analyze whether the U.S. economic recovery is real as there are both positive and negative views” after recent data showed the U.S. economy contracted in the October-December quarter, Uchida said.

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