Here’s when to get out of the Nikkei rally
Japan's Nikkei is the world's best performing major equity market this year and is tipped to head higher on yen weakness. So, at what point is it time to exit from the stock-market trade of the year?
The answer is when inflation hits the Bank of Japan's 2 percent target, says Harmen Overdijk, the head of portfolio management at EFG International, a private banking group.
Japan's core consumer prices, which exclude food, stopped falling in May and data due out on Thursday is expected to show they rose 0.3 percent in June from a year earlier, according to a Reuters poll.
(Read more: Is it 'all systems go' after Abe's big election win?)
"The government will do anything to push inflation higher and I am convinced that they will succeed this time. This will lead to a weaker yen and to higher equity prices," said Overdijk, who expects the Nikkei to rally towards 18,000 to 21,000 over the next 12 to 18 months, implying a gain of at least 23 percent from current levels.
"However, there is no long-term plan to deal with structural challenges like the ageing population, low productivity and huge relative debt position," he added.
(Read more: Japan revises first quarter growth figures upwards)
"The day the government announces they have 2 percent inflation, market sentiment will be very positive, but that will be the time to sell all your Japanese assets," said Overdijk, whose firm is long Japanese stocks and REITs.
Japan's Prime Minister Shinzo Abe has pledged to transform Japan's economy, hampered for years by deflation and weak growth. But there are some concerns that a decisive win in elections to Japan's upper house of parliament at the weekend could make Abe less determined to deliver long-term economic reforms.
The Nikkei traded around 14,715 in early Asia trade on Wednesday, undermined by weaker-than-expected Japanese export data.
(Read more: Japan's exports growth unexpectedly slows in June)
Still, after a correction in May and early June, the Nikkei appears to be back on track for stronger gains and is up almost 19 percent from a two-month low hit in June.
Abe's weekend election win could push the Nikkei to 20,000 and the yen above 105 against the dollar, Charles Beazley, the CEO of Nikko Asset Management, one of Asia's largest regional asset managers told CNBC earlier this week.
The Nikkei has surged about 40 percent this year, driven higher by aggressive monetary stimulus, a sharp fall in the yen that has boosted exporters and optimism that Japan may finally be emerging from a period of deflation.
(Read more: Nikkei will surge to 20,000: Top asset manager)
Gains in other major markets pale in comparison to the Nikkei. The S&P 500, which hit a record high this week, is up about 19 percent this year, while the FTSEurofirst 300 index of pan-European stocks has rallied about 7 percent.
"After a series of bond market reverberations in April and May, the equity market was a stealth outperformer in June. Indeed it was one of the few developed markets to post absolute gains in June," equity strategists at Jeffries, an investment banking group, said in a note this week.
"The improving breadth of the economic recovery and equity market as well as the turnaround being experienced in the housing and property sector leads us to lift our Nikkei target to 15,500 based on a year -end dollar/yen target rate of 110," they added.
—By CNBC.Com's Dhara Ranasinghe, Follow her on Twiiter: @DharaCNBC