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Can Japan’s rally continue without a third arrow?

Skepticism abounds over whether Japan's long-promised economic reforms will ever materialize, but some analysts still expect the country's stock market rally can continue.

"Structural reforms are the big challenge in Japan. The market is still waiting for more convincing evidence that structural reform will attain more substantial progress," Fan Cheuk Wan, chief investment officer for Asia Pacific at Credit Suisse private banking, told CNBC.

But she still expects shares to rally over the next six to 12 months. "We still believe the cyclical upswing in the economy is going to support further valuation expansion of the market," she said.

(Read more: Nikkei at 25,000? Nomura thinks so)

Investors pushed Japanese shares up more than 50 percent last year on hopes hope that Abenomics, or the around one-year-old plan from Japanese Prime Minister Shinzo Abe, will kick-start Japan's long-moribund economy out of its decades-long struggle against the pressures of deflation.

But while the "first arrow" of aggressive easing from the Bank of Japan and the "second arrow" of ambitious spending from the government have come through, the "third arrow" of structural reforms remain elusive.

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"We've heard about third arrows but we can't find it in the quiver," David Roche, global strategist at Independent Strategy, told CNBC. "The roadmap for Japan is that Abenomics can only succeed in rejuvenating the Japanese economy if dramatic third arrow reforms are implemented, which basically means everything pretty well from medical care to agricultural to the tax system to labor laws."

But while he's not optimistic on the reform outlook, he still owns Japanese shares, viewing them as relatively cheap.

(Read more: Is the Japan story getting threadbare?)

Credit Suisse's Fan also views the stocks as cheap, priced at a discount to their historical average.

"The earnings momentum continues to improve and Japan is a cyclical market pretty geared toward the developed market growth recovery," she said. Japanese shares are trading at around 13.7 times earnings, compared with their long-term average of around 17.6 times, according to data from Nomura.

She believes the around 10 percent drop in shares this year offers an attractive entry level.

(Read more: Japan's tax hike won't hit all retailers equally)

Without third arrow support, analysts are looking backward toward the first arrow for another market fillip.

With Japan set to raise its consumption tax to eight percent from five percent in April, likely denting corporate earnings and consumer spending, many expect the Bank of Japan to step in. The Bank of Japan kept its monetary policy steady at its meeting Tuesday, in line with market expectations.

"We'll likely see a contraction in growth, and with that further response," Andre de Silva, head of Asia-Pacific rates at HSBC, told CNBC. "It's the resetting of the first arrow," he added.

He also isn't optimistic about the prospects for any third arrow support.

(Read more: Does Sony's revamp signal a sea change for Japan Inc?)

"The timing and implementation would take years. It's not going to get an instant result. So we need to have to focus on other things. In particular, the consumption tax and the policy response as a result of that," he said.

But while analysts may expect nearer-term gains even without the third arrow, they aren't necessarily as optimistic for the longer-term.

"What you need to get is the flexibility for companies to operate in a profitable manner in the interests of shareholders. That is what Abenomics' third arrow reforms are about as regards the corporate sector," Roche said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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