Why you should be patient with Abenomics

Leslie Shaffer | Writer for
Abenomics will take time: Pro

After last year's hectic gains, Japanese stocks may be downshifting to slow and steady as economic reforms need some lag time to spur further advances, analysts said.

"Behavior doesn't change overnight, either in the U.S. economy or in the Japanese economy. Fifteen years of deflation has taken its toll and it will take time," Jonathan Slone, CEO at CLSA, told CNBC.

"Mrs. Watanabe needs to see a bit more inflation for her to really loosen that pocketbook. But I do think that will happen," he said, but added that financial markets tend to offer a leading indicator.

(Read more: Can Japan's rally continue without a third arrow?)

Tomohiro Ohsumi | Bloomberg | Getty Images

Investors pushed Japanese shares up more than 50 percent last year on hopes 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 Japanese markets have disappointed high hopes so far this year, with the shedding around 8 percent year-to-date, analysts are sticking with expectations for continued gains, albeit at a slower pace.

(Read more: And the next driver for Japan stocks is…)

"You're starting to see the secondary effects of Abenomics," he added. As an example, he noted efforts to get more women into the workforce, a key plank of Abenomics, has resulted in rising cosmetic sales.

In addition, he noted efforts to legalize gaming, possibly coming as soon as this year, are likely to provide a significant economic boost, potentially creating a $40-billion-a-year market.

"Obviously, Mrs. Watanabe will want to go play a few games," he said.

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

Others are also sticking with tempered optimism.

"Abenomics may not be meeting its original expectations of consistent growth," said Wells Fargo Private Bank in a note, citing data showing economic growth came in below expectations in the fourth quarter of 2013. But it views the recent data as a "short-term misstep."

"It may be disconcerting to some investors that the Japanese economy has recently hit a soft patch. However, we anticipate that the Bank of Japan (BOJ) may provide support to equity prices through additional stimulus measures" if economic data don't show improvements, Wells Fargo said.

Be patient for Abenomics' third arrow

Wells Fargo expects Japanese stocks to continue to rise this year. "Valuations at present levels are relatively attractive in spite of the outsized price movement in Japanese equities last year," it said. Japanese stocks are trading at around 13.6 times 12-month forward earnings, compared with a long-term average of 17.6 times, according to data from Nomura.

Some analysts expect investors may need to wait until sometime in the second quarter of the year for more gains in Japanese stocks.

(Read more: Japan will have a bond default: Fund manager)

The market is caught between a backlash against emerging markets, which has sent the yen higher as funds sought out "safe havens," and profit-taking before the country raises its consumption tax to 8 percent from 5 percent in April, investment bank Jefferies said in a note.

"With only one more Bank of Japan meeting to go before the consumption tax is hiked, there appears to be few catalysts on the horizon," Jefferies said. Analysts widely expect the BOJ will step in with more stimulus if the tax hike damps growth.

But while it believes the "easy money" has been made in the market, Jefferies is still bullish, expecting the Nikkei will rise to 16,500 by year-end, compared with its current level around 15,000.

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