Japan's stock market has ranked among the world's worst performing so far this year, and despite some bullish calls on where they are headed from here, analysts say it isn't clear whether investors should be piling back in.
In theory, the stars appear aligned for further gains after the Nikkei's around 11 percent fall so far this year.
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"The selloff in that market makes an interesting and attractive entry point," said Marc Desmidt, head of alpha strategies for BlackRock Asia Pacific, told CNBC. "Valuation remains very attractive," he said, noting the market's more than 50 percent run-up last year was on improvements in earnings.
Desmidt expects earnings improvements to continue with the yen likely to weaken further and as corporate taxes may soon be cut.
Valuations do appear attractive at 12.9 times 12-month forward earnings, a nearly 27 percent discount to the long-term average, according to data from Nomura.
But it's clear some of the optimism has been shaken. Allocations to Japan have dropped to a 12-month low, with only a net 16 percent of fund managers overweight on the market, according to Bank of America-Merrill Lynch's fund manager survey for March. So far this year, foreign investors have pulled around $17.75 billion out of Japan equity funds, according to data from Jefferies.
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Last week, Goldman Sachs cut its three-month and six-month targets for the Topix index, citing the market's "unanticipated weakness" so far this year and limited near-term catalysts.
It now expects the Topix at 1200 in three months and 1300 in six months, down from 1350 and 1375 respectively. The Topix closed Wednesday at 1172.07.
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Goldman attributed the weakness so far this year to a combination of domestic and external factors. In addition to headwinds from weaker-than-expected U.S. economic data, concerns over Chinese growth and the political tension in the Ukraine, Japan stocks face concerns over the upcoming consumption tax increase and the lack of progress on structural reforms as well as foreign selling and limited domestic buying of shares, Goldman said.
Analysts have been warily counting down to the planned consumption tax increase to eight percent from five percent in April, as it is expected to dent corporate earnings and consumer spending. Many expect the Bank of Japan will step in with further easing measures afterward.
But it's worth noting that Goldman is keeping its 12-month Topix target at 1450 as it still expects earnings per share to rise around 21 percent in the current fiscal year after last year's 70 percent increase.
"Japan remains the only major market with positive earnings revision momentum," it said, adding that based on its own estimates, the index is trading at 11.9 times forward earnings, near the historical trough of 11.7 times.
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In addition, "the market has not fully appreciated the increasingly positive news on asset reflation," Goldman said, noting the official land-price survey showed an increase for the first time since 2009. "It is important not to underestimate the positive wealth effect from rising property prices for households," it said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1