TOKYO Thu Jun 26, 2014 5:11am

Japan's Nikkei stock index will gain about 11 percent by year end as stronger-than-expected domestic consumption offsets the impact of a sales tax hike and a recovering U.S. economy lifts sentiment, a Reuters poll found.

The Nikkei  has fallen around 6 percent so far this year, hit by political turmoil in Ukraine and Iraq as well as some disappointment that the Bank Of Japan is unlikely to ease monetary policy any time soon.

But in the past few weeks markets have risen after the United States Federal Reserve expressed confidence in the U.S. economy and committed to its dovish monetary policy, which spurred buying from foreign investors.

China's upbeat manufacturing activity also attracted buying and the Nikkei has gained around 4 percent since the beginning of June.

According to the median forecast of 21 analysts polled by Reuters in the past week, the Nikkei will gain 11 percent on Wednesday's close of 15,266 points to end 2014 at 17,000. That would mark a rise of around 4.4 percent for the full year.

A March poll had predicted it would reach 17,500 by year-end.

Analysts expected the Nikkei to advance further to 18,000 by June 2015.

Forecasts ranged from 9,000 to 18,000 for the end of December and 8,000 to 20,000 for next June.

"Japanese stocks will likely perform strongly over the next few months," said Ryota Sakagami, chief equity strategist at SMBC Nikko Securities.

Prime Minister Shinzo Abe unveiled a package of measures on Tuesday aimed at boosting Japan's long-term economic growth, from phased-in corporate tax cuts and reform in the Government Pension Investment Fund to a bigger role for women and foreign workers.

Bank of Japan Governor Haruhiko Kuroda on Monday stuck to his upbeat view on activity and repeated the central bank's projection that the world's third-largest economy was headed for a moderate recovery driven by domestic demand.

"Hopes for further (policy) easing have faded, but it means that the economy is strong enough so that it does not require easing," said Takashi Hiroki, chief strategist at Monex Inc.

Other market participants raised concerns about risks from higher oil prices.

"It's not something we should be worried about now, but oil prices have a direct impact on U.S. consumption, so we need to keep an eye on any developments in Iraq," said Hiromichi Tamura, chief strategist at Nomura Securities, who expects the Nikkei to hit 18,000 in December.

Market analysts said the U.S. central bank's liquidity remains one of the main drivers for the Japanese market.

"Excess liquidity is needed to keep on attracting foreign investors, as they still drive the equity market," said Michiro Naito, executive director of equity derivatives strategy at JPMorgan, who forecasts that the Nikkei will trade at 16,500 at the end of the year and 17,000 in June next year.

"The catalysts are the global economic recovery and the renewed investment stance by Japanese institutional investors," Naito added.