"Foreign investors have started to think about the risk of not holding Japanese shares," said Shun Maruyama, chief strategist at BNP Paribas Securities (Japan) Ltd.
Foreigners' appetite to invest in Japan was already starting to grow stronger at the beginning of the year. But their buying of key Japanese stocks took off when concerns about the strength in the yen receded due to the new BOJ easing steps.
The investment money is mostly heading to shares of banks, real estate firms and other domestic-demand-related issues that benefit from monetary easing, as well as automakers, which get an earnings boost from a weaker yen.
The shares of major banks have all surged more than 20 per cent since the beginning of the year.
Shares in Toyota Motor Corp. and Honda Motor Co. have also advanced sharply, exceeding the 11 per cent gain for the Nikkei index.
"Money is flowing in from abroad, not just from hedge funds seeking short-term gains but also from pension funds and other long-term players," said an official at Daiwa Securities Capital Markets Co.The market rally was fueled by the dollar rising to 79.18 yen in Tokyo on Friday. The greenback then reached 79.40 yen in the U.S. and European markets, the highest since Japan conducted a yen-selling intervention on Oct. 31. The euro touched the 104-yen level, a roughly two-month high, on hopes that assistance to Greece will move forward.
However, some market players warn of the risk of high stock prices propped up by monetary easing.
A bubble could form if monetary easing continues globally for an extended period, said Yasuo Goto, head researcher at the Mitsubishi Research Institute.
And with the market awash with liquidity, more money could flow to commodities, driving up their prices. Crude oil's recent advance may be a warning sign.