Will Nikkei's record-breaking rally sustain even as Japan's economy sputters?

Japan's Nikkei stock index has been on a record-breaking spree on the back of robust earnings and investor-friendly measures. But the country's ailing economy has experts divided over this sustainability of this rally.

The Nikkei 225 surged past the 40,000 mark on Monday, with some economists forecasting it still has room to climb, having surpassed the 1989 record high of 38,915.87 last month.

"I would not be surprised if Nikkei hit 50,000 in a matter of a few years. Sector-wise, high-tech related companies will continue to be promising," Kazuo Momma, Mizuho Research Institute's executive economist, told CNBC via email.

Japan's corporate governance reforms have been a key driver for the country's stock markets, Momma said, while stressing that stock indexes do not necessarily represent the entire economy that includes SMEs and households.

SMEs are a critical lever in the Japanese economy, accounting for 70% of national employment and 50% of the country's economic growth. 

The rally in Japanese stocks has a disconnect with the country's economy, which recently dipped into a technical recession and lost its spot as the world's third-largest economy to Germany.

Soon after Japan entered a recession Nikkei hit 34-year highs, and the rally has been getting stronger with every passing day, despite bad news about the economy piling up.

Japan's stocks have been turbo charged by the U.S. economy and a spike in Artificial intelligence-related companies including chip firms after U.S. chip designer Nvidia posted a 265% year on year rise in its revenue and closing above a $2 trillion market cap for the first time.

"Spillover from the global boom of AI-related stocks certainly helped Nikkei," Momma said. The Information Technology sector