Investors Dump Japan, but Soros May Be Buying Again

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George Soros, chairman of Soros Fund Management

Even as Japan's benchmark stock index flirted with bear territory on Friday and then closed more than 6 percent lower for the week, there was some good news for the beaten-down Nikkei.

Japan's public pension fund said on Friday afternoon that it would change its asset allocation target by lifting its weighting of domestic stocks and lowering its target allocation for Japanese government bonds.

Billionaire investorGeorge Soros, meanwhile, returned to Japanese markets this week after his investment firm pulled out of the market in May just before the sharp sell-off in shares got underway, Dow Jones newswires reported, citing a person close to the matter.

(Read More: Japan Bear Market Gives Investors Bad Case of Déjà Vu)

CNBC has not been able to independently confirm the move by Soros, although some market watchers said they were not surprised by the talk.

The Nikkei's Performance This Week

"I can't comment on clients but it wouldn't surprise me at all," said Glen Wood, head of sales, global at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"There's been a lot of fast money moving in and out of Japanese markets but in general Japan is changing and the trend is set," he said. "What we've seen this week isn't a reversal of what we've seen over the past six months, it's a correction and an opportunity for longer-term investors to step in."

A weak yen and optimism about Japan's economic revival had boosted Japanese stocks up more than 75 percent between mid-November and May, when the market succumbed to a sharp bout of profit taking as some caution about the outlook for Japan set in.

(Read More:Dollar-Yen Shake-Out Could Just Be the Start)

The benchmark Nikkei on Friday hit a two-month low at 12,548 points. It closed down just over 19 percent from May's five-and-a-half year high, having briefly pushed into bear market territory with a fall of more than 20 percent earlier in the day.

"The real issue here is that after a 19 percent fall, the Japanese market is well and truly oversold," said Shane Oliver chief economist and head of investment strategy at AMP Capital in Sydney.

"It's fallen so far that it has restored value and is around a point where Japanese shares can bottom out and move ahead again," he said.

Hope that Japan's Government Pension Investment Fund, the world's biggest public pension fund with more than $1 trillion of assets, would buy more equities than it has in the past has helped lend the Nikkei some support, with the move announced on Friday flagged by media reports earlier this week.

"We've had a good shake out in Japanese markets and I think people are seeing value here now," said Wood at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. "There are positive things here, Japan is starting to change and that's not priced in yet."

Japan has been one of the most closely-watched developed markets this year following unprecedented change as the country's leaders try to tackle years of deflation and lackluster growth. In April, the Bank of Japan unveiled aggressive monetary stimulus and earlier this week Prime Minister Shinzo Abe laid out his plan to boost the long –term growth outlook.

(Read More: Japan Fires 'Third Arrow,' but Will It Work?)

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