Stocks in Japan hit an all-time high, surpassing the 1989 peak

What has changed in the Japanese economy that has caused stock prices to rise?

Stocks in Japan have looked cheap due to the weak yen, which has been a boon for exporters who make their profits abroad. Major changes in business have also given shareholders more rights, allowing them to make changes that benefit their shareholdings.

And unlike other parts of the world, rising inflation in Japan has recently been seen as a sign that things are moving in the right direction, after decades of falling prices and sluggish economic growth have kept people and businesses from spending.

Japanese stocks have also benefited from a downturn in China, where economic growth has slowed under the weight of a real estate market decline and a host of systemic and political challenges. Chinese markets have recently traded at lows not seen since a rout in 2015.

Foreign investors play an important role in the rise of the market.

Overseas investors have been eager buyers of Japanese stocks, pumping a net $14 billion into the market in January, according to data from the Japan Exchange Group, a marked shift from the roughly $3 billion they withdrew in December.

Corporate earnings are strong, another reason why investors are pumping money into Japan. According to Goldman Sachs, the profits of major Japanese companies will rise by more than 40 percent according to their latest quarterly results. The largest companies, such as Toyota and SoftBank, also reported some of the biggest earnings surprises, the bank's analysts noted. Toyota recently rose to a record market value for a Japanese company, about $330 billion, surpassing the target set in 1987 by telecom conglomerate NTT.

“The skeptics keep claiming that Japan never changes and that foreigners always get disappointed, so leave now,” the Goldman analysts wrote. But they said the recent surge in stock prices looks less exaggerated than during previous rallies that fizzled out.

According to a survey of fund managers conducted by Bank of America, buying Japanese stocks is the third most popular trade this year, but lags far behind the first two: betting on the Chinese stock market and buying a group of giant tech stocks . such as Apple and Microsoft, known as the 'Magnificent Seven'.

What will the Bank of Japan do now?

Economic growth in Japan remains on shaky ground. Figures released last week showed the country's economy shrank unexpectedly in the fourth quarter, compared with a 3.1 percent increase for the United States.

While much of the world has raised interest rates to combat inflation, Japan has kept them low in an attempt to fuel inflation. Japan prefers to intervene in the markets to prevent the currency from weakening too quickly or government bond yields from rising too sharply.

With growth just beginning to recover, the central bank is trying to gauge when it would be appropriate to raise rates – to support the currency – without eradicating inflation altogether.

Complicating matters are the economic fallout from the earthquake that struck the Noto Peninsula, on the country's western coastline, in January. Japan's economy is also vulnerable as much of the rest of the world begins to slow down.

For now, economists predict the central bank will raise rates out of negative territory but keep them at zero for the rest of the year.