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 capitalisation for all shares on the TOPIX's first section was 522 trillion yen ($4,431 billion) by the close of trade, having grown about 48 percent this year.
That is its biggest market capitalisation since 1990, around the end of Japan's asset bubble.
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.
One such problem shut down trading at the Tokyo exchange last month, marking the worst disruption in its history.
Many analysts expect Japanese stocks to extend gains into the new year. Brokerage Nomura Holdings has predicted the market could rise to between 20,000 and 30,000 in the next 10 years.
The median forecast of 10 analysts and fund managers put the Nikkei at 17,000 by the end of 2006, a Reuters poll showed earlier this month.
Rising land prices will help drive up shares of property firms, while banks will be supported by continued improvements in the broader economy, Yasuda's Iso said.
Individual investors are likely to play an increasingly important role as well, analysts said.
"What's so significant about this year's market was that individual investors started taking a more active role," said Cosmo's Azuma.