TOKYO — Garry Evans has been a busy man lately, jetting off to meetings in the United States to advise enthusiastic fund managers on one of the hottest topics in investing: this year's big rally in the Japanese stock market.

"There are two types of views on Japan — there's bullish and there's very bullish," says Evans, a Hong Kong-based Asia equity analyst for HSBC Securities Inc. "That is clearly where people's biggest interest is at the moment."

Foreign money, nearly two-thirds of it from North America, has piled into Japan in recent months, fueling a 27 percent jump in the Tokyo Stock Exchange's benchmark Nikkei 225 Index since May and leading to record-high trading volumes this week.

Overseas investors plowed a net $40.6 billion into Japanese shares from July to September alone — more than half of last year's total — and now account for 60 percent of daily trading, according to Tokyo Stock Exchange data. A quarter of all shares listed in Tokyo are currently owned by non-Japanese investors.

The surge is supported by new optimism about the world's second-largest economy and may even sap momentum from Wall Street as investors look across the Pacific.

But analysts also warn the party could end with a hangover amid concerns about a global slowdown, the dollar's rise and a suspicious absence of Japanese buyers.

Underscoring the rally, trading volume hit an all-time high of 4.558 billion shares on Tuesday for the 1,600 companies listed on the Tokyo exchange's first section — more than that day's combined turnover on the New York Stock Exchange and the Nasdaq.

Japanese stocks had lost about 80 percent of their value from late 1989 to 2003 as the country struggled with a burst real-estate bubble, sluggish corporate earnings, rising unemployment and mountains of bad debt at the nation's banks.

Now, Japan's steady economic recovery makes the stock market seem like a bargain-priced safe haven, while concerns about inflation and interest rate hikes in the United States undercut enthusiasm for Wall Street, which has mostly flat-lined this year.

U.S. and other foreign investors "are looking to diversify their risks," said Stuart A. Cox, who manages $223 million invested in Tokyo through the JP Morgan Japan Equity Fund. And Japan's economy is "starting to stand on its own two feet."

The Nikkei index rose to a fresh 4 1/2-year high of 14,155.06 on Friday, and Cox predicts it could rise another 13 percent to 16,000 by the end of next year.

Japan's economic growth was recently upgraded to 3.3 percent in the April-June quarter from an earlier estimate of 1.1 percent. The banks' bad loans are largely behind them, and land prices are rising for the first time in 15 years.

Unemployment has ticked up a bit since dropping to 4.1 percent in June, its lowest since 1998, but rising wages have spurred consumer spending and companies have increased investment.

Yet Japanese investors, not fully convinced the economy is really pulling out of its 15-year slump, have largely been absent from the market's rally.

Japanese were net sellers of about $10.7 billion in shares in September, according to the Tokyo Stock Exchange.

Risks do abound, including growing competition with Asian rivals like South Korea, particularly in electronics, and possible slackening demand from the U.S., a key export market.

"The Japanese stock market is very sensitive to the world economy," said Seiki Orimi, a strategist at UFJ Tsubasa Securities in Tokyo. "I believe the current movement is very much driven by short-term investors."

He predicts the stock boom will begin to taper in April, and that foreigners will start taking profits in the second half of 2006.

Also, for U.S. investors, the rising dollar — up 13 percent against the yen this year — clouds the picture.

While the weaker yen boosts profits at Japanese exporters, it also erodes stock gains when converted back to dollars.

Normally, a surge in overseas demand for Japanese stocks would lift the yen.

But expectations that the U.S. Federal Reserve will keep raising interest rates, thereby giving dollar-denominated investments higher payoffs, has offset that effect.

Still, foreign investors perceive a structural shift for the better in Japan's economy, thanks to Prime Minister Junichiro Koizumi's financial reforms aimed at shrinking government control and increasing private investment.

Analysts say his pledge to privatize Japan's postal savings and insurance system, approved by parliament last month, will free up some $2.8 trillion for possible injection into the stock market.

International investors are picking up trusted household names like Toyota Motor Corp., whose shares have climbed about 30 percent this year, and electronics maker Canon Inc., which has seen a 15 percent gain.

But they are increasingly eyeing companies geared toward a domestic recovery, such as banks, real-estate firms and retailers, which should benefit as increasingly confident consumers borrow and spend more.

Among the winners are Mitsubishi UFJ Financial Group Inc., which was christened last month as the world's biggest bank through a merger. Its shares have risen by half this year.

But investors getting in now have to watch out for overheating stock prices, Evans warned.

He is predicting only an 8 percent increase in the Japanese market by next September, compared with the 30 percent jump it's seen since May.

"Anything much higher than that, you'd have to get pretty worried about the valuations," Evans said. "But there's a lot of momentum still to go."