Those of you who have chosen to share my view that it is worth being overweight in Japanese equities have not so far had much to show for their pains, at least if you track the performance of the main Tokyo market indices, the Topix and Nikkei 225. True, there has been plenty of excitement and several powerful rallies, but the overall trend for those who have simply stayed with the flow has been one of disappointment.
In fact, since its absurdly overvalued peak in 1989, the Japanese stock market has experienced a long and steady downward trend, punctuated, typically at four-year intervals, by spectacular recoveries that subsequently proved to be false dawns. The market was up strongly in 1999 and again in 2003, with smaller companies doing even better than the indices during those periods.
After peaking in April this year, the main Japanese indices have again been showing signs of volatility and weakness more recently. Technical indicators, if you believe in them, suggest that the market is now once more at a potential crossroads: if the Topix index were to now fall significantly through its support levels at around 1,100, then there is nothing to stop it falling a lot further. In the process it will undermine the argument of those who believe (or hope) that a sustained recovery in Tokyo share prices, leading to a breakout to much higher levels, is warranted.
Having canvassed the opinion of several leading authorities on the Japanese market in the last few days, it seems to me - stubbornly or perversely, you may feel - that the case for being overweight in Japan remains intact, even though the continued volatility of the market makes it tempting to try and trade through some of the big cyclical swings. (This is not a market where indexing, for several good reasons, is such a powerful strategy as it is in other markets.)
There seems to be little doubt that the Japanese economy, which has been hamstrung by debt deflation for well over a decade, is now heading along the road to recovery. Corporate earnings are rising nicely, deflation finally looks set to drift into modest inflation in the near future, and the corporate sector has at last begun to change its attitudes and habits quite decisively towards a more shareholder-friendly system of capitalism.
In fact, according to Ian Wright, the highly experienced manager of the Morant Wright Japan Fund, some of the things that have been happening in the domestic sector of the economy in recent months would have been unthinkable even five years ago. This was when Mr Wright and his co-founder Stephen Morant, a former partner of Cazenove, first set up a boutique fund management group to invest in domestic Japanese companies.
Those of you who share my belief that it is useful to track the contrarian behaviour of expert fund managers might dwell on the fact that both these experienced professionals chose to start their new firm at a time when all eyes were on the Nasdaq boom and nobody else had much time for the Japanese market. Their fund promptly underperformed the world market by 60 per cent in its first six months, but since then has gone from strength to strength, rising 60 per cent since launch, during which time the Topix index has fallen by 15 per cent and the Nikkei 225 by 20 per cent.
The evidence of shareholder-friendly behaviour that Mr Wright points to includes a reduction in cosy cross-shareholdings between firms, a growing interest in paying dividends, the emergence of stock options for managements, and a general appreciation of the need to manage companies for profit, not for sales growth alone. While pro-shareholder behaviour has been common at the big exporters such as Toyota and Canon for some time, its spread to domestic companies is a once-in-a-generation change that seems unstoppable.
On top of that, many Japanese domestic companies now look cheap. You can no longer buy companies for less than the cash in their balance sheets, as was the case five years ago, but the average stock in Morant Wright's portfolio sells for around book value, though the market as a whole sells at 1.6 times book value. If you know where to look, in other words, and have the experience to peer through the confusion that is Japanese accounting methods, there are still good bargains to be had.
It is true that risks remain attached to the view that selected Japanese shares are good value. At the aggregate market level, according to Andrew Smithers, a fund management consultant, the Tokyo market may now be "as overvalued as the American market", which means it is selling at 60 per cent more than its fair value when measured against the replacement cost of company assets.
In Mr Smithers's view, the problem for investors in Japan is that, while a return to inflation would undoubtedly be good news for Japanese equities, some big structural problems remain in Japan. These include a big fiscal deficit; excessive debt; and (most crucially of all) very poor returns on capital. In fact, on his figures, the average return on equity at Japanese companies may be as low as 0 per cent. Only "money illusion", and a misguided willingness to believe that reported profits accurately reflect underlying profitability, is keeping the Japanese stock market afloat.
Even other optimists, such as Huw Llewellyn, co-manager of the well-regarded Thames River Japan Fund, concede that things could still go wrong in Japan.
The two biggest risks are a sudden weakening of corporate earnings, possibly triggered by a slow-down in the US and Asian economies, and a decision by the Bank of Japan to abandon its zero interest rate monetary policy too quickly. Either of these developments could choke off demand and throw the stock market into reverse. There have, after all, been false dawns before.
If the data goes that way, then there will be no option but to recognise that reality. However, to my eyes, the potential gains to investors from the change in corporate behaviour, coupled with the low ratings and the reasonable prospect of a return to inflation, continue to make the risk-return trade-off from a commitment to Japan look attractive. That said, stockpicking may well continue to be the key to achieving sustained outperformance and the risk of a fallout from a weak US economy after this year's presidential election must be rated a very real one.