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Can the Nikkei Escape From the Bears?

Thursday, 6 Jun 2013 | 12:13 AM ET
Andrew Unangst | Photographer's Choice | Getty Images

Although the fall in Japan's benchmark stock index over the past two weeks has been much steeper than anticipated, the market might just escape bear market territory, strategists say.

The Nikkei, which has suffered from a sharp bout of profit taking on this year's double-digit gains, hit a two-month low on Thursday and was trading about 0.5 percent lower at 12,955 points after briefly rebounding.

It is down more than 18 percent from a 5-1/2 year high in May and further losses that take that move to 20 percent would technically mean a bear market for Japanese stocks - a sharp contrast from the bull-run that shares have enjoyed for much of the year.

(Read More: Summer of Volatility ' Heats Up as Nikkei Sinks)

Year-to-Date Performance

"What we're seeing on the Nikkei is a correction, but it's definitely a sever correction," said Singapore-based Kelly Teoh, a market strategist at trading firm IG. "But I don't think we will get to a 20 percent fall and the Nikkei is likely to bounce – overall sentiment is still bullish."

Teoh said 13,000 was the first level of technical support for the Nikkei, followed by 12,700.

(Poll: Does Shinzo Abe's 'Third Arrow' Go Far Enough?)

Up until two weeks ago when the market succumbed to selling pressure, the Nikkei had headed higher for several months, propelled up by a weak yen and optimism about Japan's economic outlook.

But Japanese stocks tumbled 3.8 percent on Wednesday as investors expressed their disappointment that Japan's Prime Minister Shinzo Abe did not go further with the measures he unveiled on Wednesday to rejuvenate the world's third largest economy.

Difficulties Behind Abe's Ambitious 'Third Arrow'
Izumi Devalier, Japan Economist at HSBC explains that Prime Minister Shinzo Abe's long-term growth reforms will require a coordinated effort between various parties.

"Abe has set out a very ambitious road map and we have something to hold the government accountable for. I think he will push hard for the "third arrow" agenda [of structural reforms] it's just a question of whether the markets have the patience," said Izumi Devalier, Japan economist at HSBC in Tokyo told CNBC Asia's "The Call."

(Read More: Markets Vote Down Abe's Growth Plans)

Rob Aspin, the head of equity investment strategy at Standard Chartered Bank, said he expected the Japanese stock market to stabilize, with the Topix index likely to find support around the 1060 level.

The Topix, which Aspin said provided a better reflection of the underlying market, was trading at 1089 on Thursday.

(Read More: Relax, Sign Points to Eventual Rally in Japan Stocks)

"Given the strength of the market since the November lows, a sell-off was due and that has now taken place and we would expect the market to find some support and go through a period of stabilization before it performs better," he said.

"We have seen periods like this in Japan before, between 2003 and 2006 the market rallied by over 100 percent and the Bank of Japan is being particularly aggressive so this time the market has a similar potential."

- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC

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