Japanese stocks have disappointed investors since 1990. No longer.
Japan's Nikkei 225 index has climbed 15 percent since Nov. 1. The increase means Japanese stocks have done better over the past four months than they have in 17 of the last 21 calendar years. They are also beating the major indexes in the U.S. and other countries. It's new ground for the Nikkei 225, which has done worse than U.S. stocks in all but four years over the past two decades. Even with the gains, the Japanese index is still 73 percent below its peak, set on Dec. 29, 1989.
"I don't think this is just a one-time event," said Taizo Ishida, a portfolio manager who runs the $76.6 million Matthews Japan Fund and the $340.4 million Matthews Asia Pacific Fund. "I'm not bold enough to say this time is different, but it may be. The next 10 years won't be like the 1980s, but it will be up."
To be sure, Ishida said investing in Japan can appear daunting to someone looking at Japan's demographic or economic data. Its population is aging, and Standard & Poor's last month downgraded its credit rating. Last year, Japan ceded the title of world's No. 2 economy to China.
But Ishida said Japanese corporate executives he talks with now are focused on growth, when a few years ago they cared more about keeping employment steady.
Among other reasons to be optimistic:
. Price: Japanese stocks are some of the world's cheapest, when measured against their book values. A company's book value shows how much it is worth after subtracting its debt and other liabilities from its assets. A lower price-to-book ratio indicates investors are getting ownership of the company's assets more cheaply. Japanese stocks at the end of January traded at an average of 1.2 times their book value, according to investment analysis company MSCI. That's nearly 50 percent cheaper than U.S. stocks, which traded at 2.3 times their book value.
Japanese stocks don't look that cheap when measured against their profits: They trade at an average of 17 times their earnings over the prior year, about the same as U.S. stocks. But that's much cheaper than their average price-earnings ratio over the past 20 years, of 27 times.
"People are saying, 'Wow, this might be too cheap for the type of growth we might be seeing,'" said Deborah Medenica, who runs the Alger Emerging Markets Fund, which launched at the end of last year.
. Economic strength: Economies are strengthening around the world. Deutsche Bank earlier this month raised its forecast for full-year 2011 U.S. economic growth to 4.3 percent from 3.3 percent. Investors can benefit from stronger-than-expected U.S. growth in several ways, but "Japan is the best way," Credit Suisse strategists wrote in a recent report. U.S. stocks may seem like the logical way, but Japanese companies that export to the U.S. will also benefit from stronger U.S. spending. And the Japanese stocks are cheaper than U.S. ones.
Japanese exporters also benefit from strong growth across Asia. Four of Japan's top five export markets are in Asia, including No. 1 China. Trade to such countries means Japanese companies can sell their products in yen more often, Ishida said. That shields them from the yen's strength against the dollar: A stronger yen makes Japanese-made cars and cameras more expensive to customers paying in dollars.
. Safety: Stock markets in China, India and other developing countries have sunk in recent months on worries that inflation will hurt growth. Protests in the Middle East have also highlighted the risks of investing in emerging markets. That has pushed investors to yank money out of emerging market stock funds. In search of safety, many have turned to Japanese and other developed market stock funds. Investors poured more new money into Japanese stock funds during the week through Feb. 16 than in any other week in nearly four years, according to fund-tracker EPFR Global.
Consider Toshiba Corp., a maker of everything from nuclear reactors to televisions to vacuum cleaners. Its stock dropped 80 percent between the end of 1989 and early 2009. But it said earlier this month that strong growth in China helped it to a profit of 12.4 billion yen ($152.7 million) last quarter, reversing a loss of 10.6 billion yen from a year earlier. Its stock has climbed 31 percent since Nov. 1.