TOKYO -- The risk-on mood continues in the equities market, but investors are starting to gird against what might happen when the Trump-fueled party is over.
The Nikkei Stock Average gained ground for a third session Friday, closing at 17,967.41 -- just shy of the psychologically important 18,000.
The Japanese benchmark could reach 19,000 to 20,000, contends Shoji Hirakawa of the Tokai Tokyo Research Institute. Hirakawa, a market bull, pays close attention to the correlation between the yield on 10-year U.S. Treasury notes and the Nikkei average's performance.
An upturn in 10-year Treasury rates indicates a firm American economy -- and thus a wider U.S.-Japan interest spread. That in turn weakens the yen against the dollar -- and buoys Japanese exporters. Given current U.S. interest rates, Japanese stocks could rise further, Hirakawa reckons.
The ongoing rally is driven by hopes for president-elect Donald Trump's bold policy decisions such as deregulation and big tax cuts. But signs of changing sentiment are emerging.
Japanese megabanks, thought to be a major beneficiary of Trump's policies, lost steam Friday. The Nikkei subindex for the banking sector edged up just 0.1%, underperforming the broader market's 0.6% rise.
Shining instead that day were companies that do much of their business in Japan, such as railroad operators. West Japan Railway, for instance, appeared to have missed the Trump party boat, advancing 2.5% between Nov. 8 and Thursday -- short of the Nikkei index's 4% gain. But the Osaka-based company jumped 1.7% on Friday alone.
"To ready for uncertainty going forward, investors will need to have some exposure to stocks offering stability and domestic-demand companies," Masashi Akutsu at SMBC Nikko Securities said.
Not all sectors likely to get a boost from Trump's policies have been winning across the board. After the election, the prospect of price cuts for expensive drugs faded, fueling a global rebound in drugmaker stocks.
But while Eisai soared 10.1% between Nov. 9 and Friday, Chugai Pharmaceutical rose just 0.9%. This goes to show that investors are rationally handpicking stocks based on earnings and drug pipelines, an analyst at a Japanese brokerage said.
Retail investors continue to buck the trend. The balance of short margin positions at Matsui Securities reached a little over 42.1 billion yen ($381 million) Friday, the highest since July 2015. "Many investors aren't sure how hopeful they can be with Trump," said Matui Securities' Tomoichiro Kubota.
July 2015 was when the Nikkei hovered around 20,000 while overseas uncertainty deepened, including wild swings in Chinese stocks.
Beijing's subsequent yuan devaluation sent the Nikkei tumbling below 17,000 in September that year.
With Trump being an unconventional incoming president, the importance is growing for investors to watch out for another round of market volatility.