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The Nikkei advanced 0.3% to 16,230.23 in mid-morning trade, on track for a ninth straight day of gains, which would be its longest winning streak since July 2009.
Japanese markets will be closed for the New Year holiday from December 31 to January 3, and will reopen on January 6.
Driven by Tokyo's aggressive fiscal and monetary stimulus to revive the world's third-largest economy, the benchmark Nikkei has rallied 56% this year.
Despite the rally, Japanese equities remain well below their average earnings multiple for the past 10 years, indicating that valuations were not too taxing.
The 12-month forward price-to-earnings ratio stood at 14, versus the 10-year average of 16.1 and the US Standard & Poor's 500's of 15, data from Thomson Reuters Datastream showed.
A senior trader at a European bank in Tokyo said buying by retail investors on the back of the newly launched tax-free investment accounts aimed at driving massive Japanese savings into stocks helped support the index on Monday.
"We did see a bit of future selling. That seemed to be more profit-taking than anything else. That was ongoing from late last week," he said.
"The upside looks a little bit heavy. But going forward into next year, people are quite bullish on 2014, especially retail investors because they sold what they needed to sell before the (capital gains) tax increase deadline which was on Christmas day last week."
Japan will double the capital gains tax to 20% on January 1 but last Wednesday was the effective deadline to benefit from the lower tax rate, because transactions on December 26 settle next year.
Tokyo, meanwhile, launches the Nippon Individual Savings Account on January 1. It will provide a five-year tax holiday on dividends and capital gains provided the money is invested in stocks, mutual funds or exchange traded funds.
The broader Topix was up 0.7% at 1,299.13 on Monday morning, with volume at 28% of the full daily average for the past 90 trading days.
The trader said retail investors were going after large-cap stocks, such as exporters and financials as they offered stable earnings. A weak yen, which hit a more than five-year low versus the dollar, boosted the appeal of currency-sensitive exporters, he said.
Toyota Motor Corp, the third-most traded stock on the main board, gained 0.5% and Mazda Motor Corp advanced 0.9%.
Among financials, Mitsubishi UFJ Financial Group rose 1% and Mizuho Financial Group climbed 2.3% and was the second-most traded stock.
