Driven by record levels of buying of Japanese shares by foreigners and confidence that the world’s second largest economy will soon shake off years of deflation, the benchmark booked its strongest annual performance since 1986.

More individual investors also piled into the market, pushing daily trade volume and value to record levels and flooding stock exchange computer systems with massive orders.

The Nikkei gave up 1.42 percent on Friday, the last day of trade for 2005, after hitting a five-year high in the previous session.

Even veteran market analysts said they were surprised by the strength of this year’s bull run.

"I’ve been in this business for 32, 33 years, but it’s the first time that I actually saw this kind of bullish market that constantly gained ground with no year-end retreat," said Kenichi Azuma, an equity strategist at Cosmo Securities Co. Ltd.

The Nikkei finished the year at 16,111.43. On Thursday it booked its highest close since September 2000, finishing at 16,344.20.

The broader TOPIX index finished the day down 0.84 percent at 1,649.76. It put on 43.5 percent this year, its biggest gain since 1999.

The market capitalization for all shares on the TOPIX’s first section was 522 trillion yen (,431 billion) by the close of trade, having grown about 48 percent this year.

That is its biggest market capitalization since 1990, around the end of Japan’s asset bubble.

"The Japanese economy, as the approval of foreign investors has been showing, has undoubtedly improved," said Masaki Iso, chief investment officer at Yasuda Asset Management.

"This year, corporations improved their balance sheets and household spending has turned positive. Property values, which had fallen for years, have risen and that is boosting sentiment," he said.

As of the third week of December, foreign investors had bought a net 10.21 trillion yen of Japanese equities, putting their 2005 net purchasing on track to finish at a record for a single year.

The previous record was set in 1999, when foreigners bought a net 9.13 trillion yen of Japanese stocks. Foreigners were also drawn by an emphatic election victory in September by Prime Minister Junichiro Koizumi’s coalition, which is seen as pro-market.

Trade activity and value also hit records during the year, climbing to their highest levels for a single day since the present Tokyo exchange opened its doors in 1949.

But a flood trade orders — many from individual investors via online brokerages — also pushed computer systems at Japanese exchanges past capacity several times this year.