World stock markets have had a positive start to 2018, signalling a strong year for economic growth ahead.

Forefront in the optimism is Japan, whose stocks increased by over 3%—bringing it to nearly its highest in 26 years. Leading the rally were energy and financials stocks.

This comes after US stock markets closed last night with another record high.

What this means for Japan

Topix index of all First Section issues on the Tokyo Stock Exchange jumped to its highest since 1991, rising by 2.1%. The Nikkei, short for Japan's Nikkei 225 Stock Average and the leading and most-respected index of Japanese stocks, rose by 2.6%.

The Nikkei stock average surged above 20,000—something it has done before, but has not been able to sustain in the past.

The anticipated market rally in 2018 will commemorate the longest winning streak since 1989, when during the Japanese asset price bubble, the Nikkei gained for the 12th straight year.

"With a global economic expansion, Japanese companies will likely keep double-digit growth," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

Analysts have said that the expected yen’s weakness, combined with the upbeat economic outlook, means Japanese companies will be aided in posting another record profit in the new year.

Despite the good news, analysts have also warned of a risk of volatility, with Senior technical analyst at Mizuho Securities Co., Yutaka Miura saying:  "Although the weather is fine, the waves are high... there will be scattered rain."

Describing the surge, Miura also said: "More overseas market players flocked to the market in the afternoon amid hopes for higher (Tokyo) stock prices this year."

How the US plays a part

Analysts have also forecasted the dollar to trade between ¥95 and ¥120 in 2018, compared with around ¥113 in late December.

Japanese companies such as Toyota and Sony depend heavily on the US market. Construction machinery manufacturer Komatsu, for example, will receive a boost thanks to the US tax overhaul legislation enacted in late 2017.

A potential defeat of Trump's Republicans in the US midterm election in November will likely start to gradually be factored in by investors, with the Nikkei possibly dropping below the 20,000 line.

Mizuho’s Miura concludes: "Following the passage of the tax reform bill, political conflicts between Republicans and Democrats will become clearer toward the midterm elections,” adding: “The conflicts may hamper Trump's efforts to push through other policies such as his long-promised plan to boost investment in infrastructure which is scheduled to be announced in January.”