Think you’re bullish on the Nikkei? Check out Goldman

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Strong fundamentals pushed the Nikkei to fresh 15-year highs in recent sessions, leading some analysts to raise their targets amid expectations that upside momentum will continue amid strong fund flows.

"Fundamentals and flow of funds point to further upside," said Goldman Sachs in a note published on Wednesday, raising its year-end target to 21,700 from 20,000.

"Japanese firms' earnings growth will outpace other regions globally," it said, noting it expects the Nikkei to rise amid "continued flows from corporates, public pension funds, the Bank of Japan, and possibly retail"

The Nikkei rose 1.1 percent to a fresh 15-year closing high of 18,785 on Thursday, extending a near one-week rally.

Daiwa is even more bullish. It expects the Nikkei to rise to 20,000 in April, 22,500 by September and 28,000 in the first half of 2016.

If history is anything to go by, further upside is likely: "Historically, Japanese stocks rise in March if they rose in January and February," according to a Daiwa technical analysis note published on Friday. The Nikkei gained 1.3 percent in January and is up 6.3 percent so far in February.

Domestic buying fuels rally

Domestic investors are driving the current rally, which is why it's likely to continue, analysts say.

In 2014, Japanese trust banks and corporates poured 3.79 trillion yen into Japanese stocks, while foreigners only bought 853 billion yen, according to Goldman. So far this year domestic spent 970 billion yen on the Japanese stock market, while foreigners have sold 1.1 trillion yen worth of shares.

Goldman expects the main buyers – the Bank of Japan (BOJ) and the Government Pension Investment Fund (GPIF) – to continue buying.

The BOJ has tripled its purchase of Exchange Trade Fund to 3 trillion yen and the GPIF, which last October more than doubled its Japan stock asset allocation to 25 percent, could spend up to 3.5 trillion yen on stocks.

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Furthermore, many analysts expect Japan's public-sector pension funds to align their portfolio allocation with the GPIF's. On Wednesday, public employee pension fund KKR, which managed assets of 7.3 trillion yen ($61.5 billion) as of March 2014, said it would mirror GPIF's new allocation policy, raising its stock allocation to 25 percent from 8 percent.

Bullish on Abenomics

Prime Minister Shinzo Abe's economic policies, dubbed "Abenomics", are another "reason to keep the faith," according to Goldman.

The first phase, or arrow, of Abenomics – aggressive monetary easing by the BOJ in April 2013 and again in October 2014 – triggered a stock rally and sent the yen tumbling against the U.S. dollar. Since Abe's return to power in December 2012, the Nikkei has risen 81 percent, while the yen weakened by 40 percent, boosting profits at Japan's blue-chip exporters, who are heavily weighted on the benchmark index.

The third arrow of structural reforms by the government has also made "faster-than expected progress" and is a "corporate governance revolution," Goldman said.

The government's emphasis on shareholders' rights and return of equity target will help lift earnings per share by 22.1 percent in the next fiscal year 2015, 11.4 percent in FY2016 and 11.7 percent in FY2017, according to Goldman's forecasts.

And with fiscal 2015 price-to-earnings multiple for listed Japanese companies at just 13.6 times compared with 17.3 times in the U.S. and 16.4 times in Europe, current valuations do not reflect Japan Inc's "robust earnings growth," said Goldman.