The bear market in Japanese stocks has lasted for nine years and the Nikkei 225 share index is less than half as high as it was in 1989, although it is the best performing index so far this year. So Akiko Emori, a London- based fund manager at Fleming Asset Management believes the Japanese market is ripe for investors to build up selective holdings. This claim cannot be made lightly. There have been false dawns before. The Tokyo index bounced by 30 per cent in 1992 and 40 per cent in 1995-6, to fall back again. The rally from the 1998 low has just outperformed that rally.
Fleming do not base their argument on an impending recovery in the Japanese economy, expected to shrink again in fiscal 1999 before levelling in 2000. They do believe many Japanese firms have finally accepted the message that profits can be generated by cutting costs rather than by massive investment.
The buzz-word in Japanese business talk is now "restra", Japanese for restructuring, meaning a willingness to pension off senior management, close factories, sell unprofitable subsidiaries and make employees redundant. This is a world away from the traditional Keiretsu system which encouraged companies to invest heavily in each other and support the less successful ones.
Investing in Japan has only ever been about growth, never income, and in spite of the slump in share prices, the top 225 companies still yield less than 1 per cent, trading on 67 times annual earnings. But many companies, says Ms Emori, are now trading at less than their asset value.
Investors must be selective, she says, and avoid investing in companies in the traditional smokestack sectors, which make up 22 per cent of the market capitalisation of the Japanese economy, compared with 11 per cent in the US.
Several Japanese companies proclaim structuring programmes more apparent than real. Sony's price shot up earlier this year after it announced a 10 per cent cut in its labour force, so other firms went through only the motions.
Ms Emori says: "Investors need to identify dynamic, entrepreneurial company management, good quality undervalued growth stocks and companies restructuring, those being the ones that are likely to out-perform over the long term, and they may not be included in the Nikkei 225 index."
Stock-picking is inevitably more difficult in faraway Japan than it is in the UK where the investors can be sure of a steady flow of financial information on which to select and buy shares. The next best thing is to find a fund manager who can do that. Fleming will not touch the "old- style" Japanese banks groaning under a load of bad and doubtful loans especially to property companies, dating back to the bubble economy of the Eighties.
But a detailed investigation of many Japanese firms will find companies, especially in the service and technology sectors, which have adopted modern management methods to engender growing profits and return on capital even in a generally stagnant economy.
Its stock-picking teams in the UK and Japan have pin-pointed a range of companies which have already achieved a double digit return on capital, compared with a Japanese overall average of less than 2 per cent.
Tips include Softbank, Japan's leading Internet company, which has already tripled since the start of the year and could double again, Hikari Tsushin which operates a mobile phone subscription agency, Ryohin Keikaku, a new retail chain, Shohkoh Fund, a specialist lender to small and medium-sized companies and FSAS, a computer service provider spun out of Fujitsu.
Over the year to date, the Fleming Japanese Fund has outperformed the Nikkei Index by 100 per cent, and its sister, S&P's Japan Growth Fund has beaten the sector average and the Nikkei index. In both cases, more than half the portfolio is invested in electronics and services, the rest in consumer goods and retailing - and only 10 to 11 per cent in financials.