By Kevin Buckland
TOKYO (Reuters) - Japan's Nikkei share average rallied to a fresh 34-year peak on Monday as the U.S. S&P 500's record-high close on Friday buoyed investor sentiment, despite continued signs of overheating in the Asian market.
After opening sharply higher, the Nikkei fell back a bit in the morning session before rising as much as 1.69% to 36,571.80, a level not seen since February 1990, in late trade. It closed the day 1.62% higher at 36,546.95.
The rally was extremely broad-based, with 207 of the index's 225 components advancing, versus 17 decliners and one that was flat. Also, every Nikkei sector gained with real estate and technology being the top performers.
On Friday, the S&P 500 posted its first record-high close in two years, as AI fever drove big gains for chip shares and other heavyweight tech stocks, with server maker Super Micro Computer (NASDAQ:SMCI) lifting its profit forecast.
In Japan, AI-focused startup investor SoftBank (TYO:9984) Group gained 2.41%, while chip-testing equipment maker Advantest, which counts Nvidia (NASDAQ:NVDA) among its customers, climbed 3.52%.
The Nikkei's 9.2% advance so far this year has put it head and shoulders above developed market rivals, many of which are in negative territory.
However, analysts have been warning of a potential pullback as technical indicators suggest the market has overheated. The relative strength index (RSI), for example, sits at 76.2, well above the 70 level that signals overbought conditions.
Japanese shares have had an additional tailwind this year from receding bets for an imminent end of Bank of Japan stimulus, particularly after the devastating New Year's Day quake on the country's west coast. The central bank announces policy on Tuesday.
The Nikkei generally rallies on a weaker yen, as it makes Japanese exports more competitive and boosts the value of overseas revenue. However, an ostensibly yen-boosting hawkish BOJ shift won't necessarily hurt the Nikkei rally, according to OANDA strategist Kelvin Wong.
"The Nikkei 225 is much more following the U.S. stock benchmarks now, rather than the dollar-yen rate," Wong said.
"Even if the BOJ signals it's starting to shift away from negative interest policy tomorrow, I think that could be a positive for the Nikkei, because it gives market participants confidence that Japan is not going to slip back into deflation."
Although the Nikkei looks due for a short-term pullback, the uptrend remains intact, and a test of 37,000 is likely in coming weeks, Wong said.