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JPMorgan Says It's Still Not Sold on Japan

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Despite Japan's landmark policy shift to drive growth and beat deflation, which has led to a massive rally on the Nikkei and weakened the yen, one bank is not yet buying the recovery story.

JPMorgan Private Bank said Thursday it remains underweight on Japanese equities, adding that the bank is unlikely to shift its stance on the market until there is more concrete proof of structural reforms in the world's third largest economy.

(Read More: How a Big Election Win for Abe Could Defeat Reforms)

"We want some proof. The first two arrows are showing signs of working, but you just don't know if those two arrows get him [Prime Minister Shinzo Abe] elected and the follow through isn't there," Nathan Slack, head of Southeast Asia at JPMorgan Private Bank told CNBC Asia's "Squawk Box", referring to elections for the upper house of parliament scheduled for July 21.

Abe's Liberal Democratic Party (LDP) is expected to secure a majority in the elections. This could make it much easier to pass through reforms for the labor market and deregulation, which form the third arrow of Abe's policies to rejuvenate the economy.

The first two arrows - monetary and fiscal stimulus - have led to investor optimism and many strategists believe that a victory for Abe would be highly positive for the stock market going forward.

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

"We've seen 20 years of not enough, the big question is: do the structural reforms actually take care of enough where you start to see inflation come back into that market. And that's a really important thing for us to see. Once that happens you see earnings power grow and also retail sales come up, which we've started to see a little bit," Slack said.

"Our positioning on Japan is the largest debate we have in our weekly strategy meeting - whether we actually reduce that underweight to neutral," he added.

(Read More: Latest Data Help Allay Doubt Over Japan's Policies)

Slack said the bank is currently looking to add exposure to Japanese stocks that would perform well in a choppy market environment, pointing to the mid-cap sector.

Japan's equity market has suffered wild swings in the recent months owing to domestic government bond market volatility, uncertainty over the timing of U.S. Federal Reserve's plans to scale back monetary stimulus, as well as a slowdown in the world's second largest economy, China.

After the sharp downturn that began in mid-May, however, Japan's equity market has made a sizable comeback, rising more than 12 percent over the past two weeks. This has been driven by an improvement in the country's corporate earnings outlook, positive economic data and a reversal in yen strength, say strategists. Dollar-yen has risen 1.6 percent over the same period.

(Read More: Is It Game Over for Japanese Equities?)

Despite the volatility, foreign investors have continued to pour funds into the market. Foreigners bought a net 486.9 billion yen ($4.86 billion) worth of shares in the week through July 6, after buying a net 479.4 billion yen in the previous week, according to the Ministry of Finance's capital flows data published on Thursday.

John Vail, chief global strategist at Singapore-based Nikko Asset Management, for example, said he continues to believe Japan is in a long-term bull market.

(Read More: Hold On, Japan Bond Market Swings Aren't That Wild)

"We're still quite positive on the country. It's still in an upswing. It's got an accommodative monetary policy while the Fed is easing [back]," Vail said. He sees 5 percent upside for the country's stocks over the remainder of the year and expects dollar-yen to rise to 103 over the same period.

The Nikkei has risen 66 percent since mid-November, when Abe kicked off his election campaign.

By CNBC's Ansuya Harjani