Is dust settling on the Nikkei’s rally?

With the dust settling on the Bank of Japan's (BOJ) surprise shock-and-awe easing campaign last month, analysts say the huge rally in the country's stock market could stall.

Both the Nikkei and Topix rose more than one percent in early trading Wednesday to 17,326 and 1,389, respectively, on a media report that Prime Minister Shinzo Abe will postpone a planned sales tax increase and call a general election for December.

"This may be the last strong rally in Japan in till 2016," Societe Generale said in a note this week. While the BOJ's latest steps weakened the currency significantly -- a move strongly correlated with gains in Japan equities -- Societe Generale believes further weakness in the yen is likely limited.

The U.S. dollar is fetching around 115.83 yen, after touching 116 yen Tuesday. Dollar-yen has surged 6 percent since the end of October, when the BOJ expanded its massive asset buying plan first deployed last April in a bid to achieve a 2 percent inflation target by next year.

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"We see the current competitive devaluation of the yen as more of an end to a process which started in 2011 at 75 and may end up at 120 (down 38 percent in total, another 4 percent potentially) than the start of another 50 percent or so down-leg," it said. "We thus see the current Japan currency and equity market scenario as a short-term tactical move, rather than a long-term structural trend."

Kazuhiro Nogi | AFP | Getty Images

If the yen doesn't fall beyond 120 against the dollar, it would leave the Topix at around 1525 and the Nikkei at around 18,750 by June 2015, Societe Generale estimates.

Societe Generale is neutral on Japan within Asia Pacific, expecting better returns in other markets.

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The central bank pledged to triple its purchases of exchange-traded funds and real estate investment trusts, extend the duration of its portfolio and increase its purchases of Japanese government bonds, and increase the pace at which it expands its monetary base.

But since last week, the pace of gains in the Nikkei has stalled. Some believe that's just a pause for breath.

"Yen weakness is not the whole story," Julian Jessop, chief global economist at Capital Economics, said in a note Monday. While surges in Japan stocks have coincided with declines in the yen, "over this year as a whole, the performance of Japanese equities has been more closely linked with those of their peers, notably in the U.S.," he said. "This suggests that there is some room for the Nikkei to outperform even in the absence of fresh falls in the yen."

Capital Economics expects the Nikkei to reach 19,000 by the end of 2016.

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Others are also cautiously bullish.

"Knowing what steps [the BOJ is] willing to take, you have to be a bit more aggressive in your estimations," Ed Rogers, CEO of Rogers Investment Advisors, told CNBC.


But he advises playing Japan shares via hedge funds, citing advantages when the market hits turbulence.

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"We think there's still things that could go wrong," Rogers said, citing concerns over relations between China and Japan as one potential headwind. "Hedge funds protect you the most when there are speed bumps, if you will, on the way to that positive story we're telling over the medium to long term."

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