Abenomics may have clocked up a victory in the battle to revitalize the moribund Japanese economy with better-than-expected retail sales bolstering the outlook and spurring the Nikkei to a near-six-year closing high.
The Nikkei jumped 1.8 percent Thursday to end at 15,727.12, its highest close since late 2007. However, the index still remains well off its 2007 pre-financial-crisis peak at 18,300, not to mention its all-time high of around 38,950 touched just after the go-go 1980s ended.
"Obviously, there's a great story in here," said Nicholas Smith, Japan strategist at CLSA. "The story is huge quantitative easing, backed with fiscal stimulus."
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It's an opinion being chased by a lot of funds, with foreign investors pouring $126.5 billion into Japan mutual funds since the start of the year through November 20, according to data from Jefferies.
The stock market's gains came as the yen weakened. This was partly driven by positive U.S. economic data pushing up the dollar on expectations the Federal Reserve will likely begin to wind down its bond-buying soon -- even as the Bank of Japan is set to continue with its massive easing program. The U.S. dollar was fetching as much as 102.27 yen intraday, up from the mid-101 range on Wednesday.
Helping to spur the stock rally, fresh data showed Japanese retail sales rose 3.1 percent from a year-earlier in September, well above the 1.9 percent rise analysts surveyed by Reuters had expected and a sign consumption may be picking up. Spending on luxury goods, food and automobiles led the rise.
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Analysts attribute the positive data to Abenomics, or the aggressive economic policies embarked by Prime Minister Shinzo Abe earlier this year to revive the deflation-plagued economy.
Retail stocks were among the gainers, with Fast Retailing, which is heavily weighted in the Nikkei index, jumping 3.5 percent to 38,950 yen and Seven & I tacking on 1.1 percent to 3,755 yen.
But some analysts are concerned that the good times could soon be coming to an end and that consumers may be front-loading their purchases to beat the April consumption tax hike and that consumption and the economy may shrink once the levy is introduced.
To counter concerns over the tax hikes potential effects on the economy, the government will introduce a stimulus package expected to contain increased benefits for families with children and low-income earners, subsidies for new home purchases and potential corporate tax cuts.
"The government feels a little bit cornered," Naomi Fink, CEO of Europacific Consulting, told CNBC, adding it may feel it needs to put these measures in place because the market believes there will be no post-tax consumption rebound without them.
"We may need to see follow through in (increases to) wages before we see the next leg up in consumption," she said, but she expects wage inflation will probably follow continued asset reflation.
Much of the concern stems from many economists' belief the 1997 consumption tax hike plunged the country into a recession. However, others expect the tax hike won't be traumatic to the economy.
"Japan has a massive trauma about the consumption tax hike in 1997," said Smith. "They're frightened the whole economy will fall apart. I think it'll be a Y2K and they'll be massively overstimulated" by the budget plans and the quantitative easing from the central bank.
In 1997, banks were under the screws and company balance sheets were "Swiss cheese,"he said. Banks and borrowers are now overcapitalized and balance sheets are "squeaky clean," he added.
He expects Japan may continue to head to the stores, tax hike notwithstanding. "The weaker yen has made people do luxury shopping inside Japan rather than overseas," he noted. Japan's consumers "are dangling their feet over a lot of cash and as long as they don't think their job is at risk, they might go out shopping."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1