Japanese stocks are back in vogue, at least for now, despite lingering worries over dismal economic prospects and the strong yen

At least part of that newfound popularity is coming at the expense of Asian neighbors, as global funds look beyond China and other emerging markets. The big question for investors in Japanese stocks is how long the trend will last.

Last week, the Nikkei Stock Average climbed above 10000, capping a 14% climb since the end of August to close Friday at 10022.39.

The rally stood out amid flagging shares in most other Asian markets in recent weeks, particularly in China. Investor sentiment in Japan has improved even as the fragile economy looks likely to remain at a standstill or even face another downturn.

'Foreign funds that have been selling Japanese stocks to buy [other] Asian shares are now taking profits in Asian stocks and buying back the Japanese shares,' said Kenichi Hirano, an operating officer at Tachibana Securities.

The reversal in Japan's fortunes came after the Nov. 3 rollout of a $600 billion bond-buying program by the U.S. Federal Reserve, sparking fears of a flush of liquidity into the already bubbly emerging markets.

Since then, the Nikkei has gained 7.1% versus a 6.4% drop in China's Shanghai Composite Index as of last Friday's close.

Over the same period, South Korea's Kospi is down 0.1%, Hong Kong's Hang Seng Index is 3.8% lower, and the Dow Jones Industrial Average is off 0.1%.

For China, a strong economy has created its own woes. After the consumer-price index jumped 4.4% in October from a year earlier, worries about monetary tightening sparked sharp selloffs in equities and commodities. Late Wednesday, Beijing said it was ready to impose price controls on staple goods to rein in inflation, and on Friday it raised the level of reserves that banks must hold by half a percentage point to 18%.

Japan has been seen as dependent on its now-larger rival for its own economic growth. But moves to slow China's growth may not be a negative for Japan, according to Goldman Sachs chief Japan strategist Kathy Matsui.

'Paradoxically, the more policy tightening [there is] in China, the greater the chance that global investors may opt to focus on Japanese stocks instead,' Ms. Matsui wrote in a recent report, as the brokerage raised its position on Japan to neutral from underweight.

She cited a similar pattern of Japan's outperformance between December 2009 and April, when the Chinese government also took tightening measures to stem rising prices.

During that period, the Nikkei rose 18% while the Shanghai Composite shed 10%.

Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management, said, 'Funds are flowing into undervalued Japanese stocks as share prices weaken in Asia due to inflation and monetary-tightening concerns.'

Helping to fuel the buying has been cheap share valuations even as many big companies posted strong earnings in the just-ended half-year results. An estimated 64% of all the companies on the first section of the Tokyo Stock Exchange have been trading below their book value.

'Japan will likely see its best phase next year,' said UBS Securities Chief Strategist Shoji Hirakawa. The Nikkei index may rise to 10250 by year-end, and at least to 13000 by next year, outperforming the U.S. market, he said.

But many investors also caution that the current market rise isn't necessarily for the long term, given Japan's poor economic fundamentals, shrinking population and structural problems.