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Nikkei May Now Be a Trade Only for the Brave

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The Nikkei 225 rebounded almost 2 percent on Friday after suffering its worst one-day fall since late May on Thursday, reflecting the extreme volatility in the market.

With these large swings likely to persist in Japanese equities, which are down over 20 percent in less than a month, it would take a brave investor to buy into this market now, but if he did, there could be big gains, strategists told CNBC.

"I'm a worrying bull, I've taken advantage of the sell-off. We think the Japanese stock market is headed higher [but] will have huge volatility," said David Kotok, chief investment officer at Cumberland Advisors.

The recent ups and downs in the benchmark index have prompted Chris Weston, chief market strategist at trading firm IG Markets, to say: "The Nikkei, it's a trade for the brave."

Uncertainty over when the U.S. Federal Reserve will scale back on its bond buying program, which has been a large driver of instability in the market, will continue to keep investors on edge over the coming weeks, said market players.

In addition, investors will also be closely watching how the Japanese government and central bank respond to concerns over Prime Minister Shinzo Abe's long term growth strategy and bond market volatility.

(Read More: Is an Overconfident BOJ to Blame for Market Woes?)

According to Nicholas Smith, Japan strategist at CLSA, instead of panicking, investors should take this opportunity to buy the market on dips, arguing that there is already evidence of "Abenomics" bearing fruit in the form of rising consumer prices, wages and bonuses.

"Why would you panic when there's a bargain sale at the local super market? It's time to fill up your trolley and not to panic and throw everything out," he said.

Addressing disappointment with Abe's "third arrow" or long term growth strategy, which came after aggressive monetary and fiscal policies, Smith said there are a lot of structural changes in the works, but clarity on these reforms will likely emerge following elections to the upper house of parliament on July 21.

(Read More: A Silver Lining for the Volatile Nikkei)

"Structural reforms require bitter medicine that is probably not going to be talked about in detail before the election - we are going to be talking in veiled terms - after that they [policymakers] have a mandate to get on with do this," Smith said.

Nomura equity strategists, meantime, raised their year-end targets for the Nikkei 225 and Topix late Thursday driven by a stronger than expected recovery in earnings.

The bank upgraded its target for the Nikkei to 18,000 from 16,000 and for the Topix to 1,500 from 1,350 - marking around 40 percent upside from current levels.

"Assuming that 'Abenomics' has not been defeated, we see no reason to become bearish on Japanese stocks, and recommend a bullish stance," they said. "We think the full impact of 'Abenomics' on capital expenditure and household incomes has yet to be felt."

Nomura strategists say it is increasingly likely that the Bank of Japan will take additional action given the souring in market sentiment.

(Read More: Nikkei Bull Run Over, May Test 11,500: Chart)

"Abe administration has responded quickly to market participants' disapproval by revealing its intention to come up with further growth strategies, which we see as a positive," he said.

Abe on Friday pledged to take more steps to boost economic growth after next month's elections, saying that measures thus far are just a "starting point."

By CNBC's Ansuya Harjani

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