Japan Bulls Unwavered by Stock Market Rout

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A day after Japanese equities witnessed their sharpest one-day drop in more than two years, investor optimism over the outlook for the country's stock market remains unshaken.

"The market was very right for a correction. [But] longer term there is a lot of potential in Japan. Obviously markets don't move in a straight line," David Dietze, president and chief investment strategist at Point View Wealth Management told CNBC on Friday.

The benchmark Nikkei 225 rebounded 3 percent at the start of trade on Friday after its 7.3 plunge on Thursday, while the Topix traded up 2.8 percent following its 6.8 percent fall a day earlier.

Strategists said the pullback was merely a "healthy correction," noting that the uptrend is still in place.

"Realistically, we were seeing signs all along that were over bearish the Japanese yen and bullish on the Nikkei. I view this as a healthy correction in Japanese equities and the currency," David Rodriguez, quantitative strategist at DailyFX said, referring to the fall in dollar-yen to a two-week low of 100.83 on Thursday.

Despite the market rout that was triggered by a host of factors ranging from a spike in Japanese government bond (JGB) yields to worries that the U.S. Federal Reserve could taper the pace of quantitative easing in the next few months, Japanese stocks still remain the world's best performers, up over 40 percent year to date.

(Read More: Perfect Storm Sparks Massive Nikkei Sell-Off )

According to Dietze concerns that rising Japanese sovereign bond yields will drive investors out of equities and into government debt are still premature.

"One percent [JGB yield] does not strike the average investor as something to rotate out of stocks to grab for. We've never seen 1 percent here [in the U.S.], so it's still ridiculously low. It's premature to say the Japanese rally is finished," he said.

The JGB yields rose to their highest level in a year on Thursday at 1 percent, prompting the Bank of Japan to hold true to its promise of taking action to stabilize an incredibly volatile bond market.

(Read More: Japan Bond Yields Spike Again- 10-Year Now at 1% )

Tai Hui, regional head of research, Asia at Standard Chartered Bank estimates that institutional investors may be attracted back into the government bond market, when 10-year JGB yields reach levels of around 1.3-1.5 percent.

Pace of Gains Could Slow

Some strategists, however, warn that exuberant gains seen in the Japanese market since last November - when Prime Minister Shinzo Abe first started talking about the need for radical monetary and fiscal policies to reignite the economy - could slow in the months ahead.

(Read More: Huge Japan Stimulus Still Not Enough: Kyle Bass )

"Returns going forward are going to be a lot more modest than we have seen over the past six months," said Malcolm Wood, head of investment strategy at Morgan Stanley Wealth Management.

Damon Vickers, managing director and chief investment officer at brokerage Damon Vickers & Co shared a similar view: "I don't think that the Japanese rally is over with but we're probably going to pause in here."

By CNBC's Ansuya Harjani