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Is the Nikkei’s Rebound for Real?

Junko Kimura | Bloomberg | Getty Images

While stocks globally took a beating last week on worries about U.S. monetary stimulus ending and economic growth in China slowing, one major market staged a quiet comeback.

Japan's Nikkei closed the week with a rise of over 4 percent, marking its first weekly gain in five weeks. The stock market opened 1 percent higher on Monday on weakness in the yen, before retreating slightly to trade flat around 13,227.

"Clearly a lot of volatility remains in global equity markets, but we believe that the Nikkei is on a generally upward trend," said Makarim Salman, head of Japanese financials research at the brokerage Jefferies in Tokyo. "The yen is on a weakening trend and the earnings outlook has improved for Japanese corporates."

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Analysts said a move above 12,600 last week was positive for the Nikkei and the market should target the 14,500 level in the months ahead.

The Nikkei was knocked off a five-and-a-half year high in May as concerns about an end to U.S. monetary stimulus, doubts about whether Japan's radical economic policies can lift the economy out of the doldrums and a rebound in the yen encouraged investors to take profits on the market's double-digit gains this year.

"The weaker yen is helping exporters and that's the only difference between the Nikkei and other Asian markets," said Desmond Chua, a market analyst at CMC Markets in Singapore.

The yen has weakened almost 5 percent against a broadly-robust dollar since hitting a two-month low earlier this month.

(Read More: Is the US Dollar Now Unstoppable?)

That's helped Japanese stocks recover almost 7 percent from a two-month low hit in mid-June. Compare that with the S&P 500, which is down about 2.8 percent over the same period, and European shares which are down almost 3.5 percent.

Japan's Topix index, which some analysts believe provide a better idea of underlying trends in Japanese stocks, is up more than 6 percent from a two-month low hit earlier in June.

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"Short-term volatility is still there given uncertainty over the Fed [U.S. Federal Reserve], but we might start factoring in the positive impact of Japanese policies again and [Prime Minister Shinzo] Abe's policies are also becoming a bit clearer," said Chua.

Abe is widely expected to step up his efforts to reform Japan's economy and improve its long-term growth prospects after next month's elections to the upper house of parliament. On Sunday, the LDP made big gains in a Tokyo assembly election, which analysts say bodes well for the LDP's performance in next month's elections.

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

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