Background. In 1989 the Emperor’s palace in Tokyo – occupying an area barely the size of Central Park, was worth more than California. The Japanese stock market was the largest in the world and sold at a multiple equivalent to nearly a century of earnings. Salary men ate French gateaux topped with gold flakes off gold plates in Roppongi. More Ferraris cruised the streets of Tokyo than in any other city in the world. Over the next 15 years, the real estate and stock markets of Japan vaporised. By 2002 the banking sector, after several false starts, lay in ruins and an acute political crisis led to the election of a reforming Prime Minister, Mr Junichiro Koizumi, with a mandate to return Japan to prosperity. The opportunity.

The opportunity. The Japanese stock market should be able to generate annual returns of 15–20% for many years (it stands at 16,000 compared to 38,915, its peak on 31/12/89). The TSE now sells on a PER comparable to Western developed stock markets. Second section Japanese stocks can be found whose current assets (i.e. cash) exceed the market capitalization of the company itself (thereby valuing the business at zero). Deposit rates are under 1% so that Japanese domestic investors – the biggest savers in the world – urgently need higher yielding alternatives (i.e. stocks). Corporate Japan – previously managed for its employees, now managed for its shareholders – is starting to prosper again. Product lines have been reduced, Western- style management and shareholder activism have asserted themselves, overseas markets (e.g. China) have developed and quality control has further been improved. Toyota is now the largest car company in the world (largely over the body of GM). Western financing techniques have been introduced through a new breed of private equity funds and M&A boutiques. Finally, land prices – victims of an Irving Fisher Debt Deflation – have started to rise. The banking system has been saved and credit is starting to flow again.

Ways to play the theme. Equity funds, particularly second section and small cap funds, real estate funds, Japanese REITs. Avoid index-hugging managers who will under perform.

Particular factor skills required of selected managers. Local knowledge of Japan and language skills, corporate finance type knowledge for the restructuring story, "value"-investment style, experience of "up / down" Japan cycle.