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About-face by bears sends Nikkei to 21-year high

Market may face now weaker headwinds

TOKYO -- The Nikkei Stock Average staged a dramatic ascent Friday afternoon, breaking though the 21,000 level for the first time in almost 21 years, despite the lack of any obvious triggers such as a weakening of the yen or remarks by key officials.

The day marked the ninth straight session that the index rose, and in dollar-denominated terms, the Nikkei average also reached its highest in more than 17 years. Foreign investors who had built up short positions in the Nikkei futures market "finally gave up," in the words of a trader at a major securities brokerage, and started buying in the afternoon, looking to limit the risk of incurring losses.

Domestic investors who had been bearish joined the herd. Individuals, regional banks and others that were holding so-called bear exchange-traded funds, which produce profits on market declines, unloaded them. Selling of bear funds leads to buying of futures, pushing up stock prices.

Outstanding contracts for Next Funds Nikkei 225 Double Inverse Index ETF, a bear fund, reached a record high Thursday. But on Friday, this ETF was among the top sold, according to SBI Securities' trading value ranking.

And Nikkei-linked bonds are also playing a role. These bonds are redeemed before maturation when the Nikkei average reaches a predetermined knockout price. When the index nears that price, securities brokerages and others square their long positions on futures.

Outstanding Nikkei-linked bonds totaled around 1.4 trillion yen ($12.4 billion) as of Friday, according to estimates by bond information service provider Imperial Finance and Technology. But for more than 1 trillion yen of the bonds, the Nikkei has already reached the early redemption level. So " the unwinding of long positions has mostly run its course," said CEO Masakatsu Wakayu.

Once above the 21,000 mark, the Nikkei index faces no resistance from those selling on the rally. With selling pressure limited, Makoto Shiota of Nomura Securities says "a full-blown uptrend is developing."

Yet many observers note the weakened state of Japanese companies. Japan Inc. will continue to shrink unless some industry-standard setters emerge, like Apple and Google of the U.S., said Jesper Koll of WisdomTree Investments Japan.

Sony once changed the world with its Walkman portable music players. A further ascent by the Nikkei index depends on how much luster Japan Inc. can regain in this era.

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