After a blow-out 2013, Japan's stock market seems to have lost its luster, but according to global research house Capital Economics the Nikkei is set for a dramatic turnaround.
"The prospect of renewed outperformance in the Nikkei is good, especially with the possibility of further aggressive stimulus," Julian Jessop, chief economist at Capital Economics said at the company's annual conference in Singapore on Wednesday.
Capital Economics sees the Nikkei rallying 20 percent from its current level of around 14,093 to 17,000 by fiscal year end in March 2015. It expects the index to reach 18,500 by March 2016.
This would mark a dramatic turnaround for the Nikkei which has fallen 13.2 percent year to date, giving up a large chunk of last year's 55 percent rise.
Concerns over the impact of a consumption tax hike in April coupled with uncertainty over Japan's structural reforms led some investors to lose faith in Abenomics - the aggressive plan unveiled by Prime Minister Shinzo Abe in 2013 to revitalize the economy through monetary stimulus, fiscal spending and structural reform.
Capital Economics shares these concerns, but believes further aggressive monetary stimulus from the Bank of Japan (BOJ) will reinvigorate the country's stock market, propelling it higher over the coming years.
"Monetary stimulus should indeed be a key driver, as it should push the yen lower and boost the yen-value of overseas earnings," said Marcel Thielant, Japan economist at Capital Economics. He expects the yen to decline to 120 per dollar by year end from around 101.5 currently.
Thieliant added that the BOJ's inflation target of 2 percent was too optimistic. Once the BOJ realizes he expects the central bank will be compelled to ease further to boost inflation levels.
The BOJ expects the core consumer price index to rise 1.3 percent for fiscal 2014/2015 and 1.9 percent for 2015/2016.
"Our own forecast for inflation for the current fiscal year, excluding the impact of the consumption tax hike is only 1.1 percent. The upshot is that in our view additional monetary easing is still likely to be required," he added.