Land of the Rising Stocks

To invest anywhere, you have to be patient. To invest in Japan, you have to be masochistic. On Dec. 29, 1989, Japan's Nikkei 225 stock index closed at 38,915.87. Some 14 years later, the Nikkei is at 10,410.15--a 73% cumulative loss during a period when U.S. stocks quadrupled in value. Yet suddenly the Japanese market is hopping. The Nikkei is up 17% this year, just a hair behind U.S. stocks.

Is this a "dead-cat bounce"--a temporary rebound from a permanent decline--or the first sign of true recovery? to paraphrase Winston Churchill, the rise in Japan's market may not signal the end of the country's troubles, nor the beginning of the end. But it may be the end of the beginning of its turnaround. As Tom Shrager, co-manager of Tweedy, Browne Global Value Fund, puts it, "Everything you hear about Japan you should consider in slow motion, because it moves so sluggishly." With that caveat, here are some reasons to be cheerful:

--Prime Minister Junichiro Koizumi's government has made at least limited progress in cleaning up the country's protracted banking crisis.

--The system of cross-shareholding, under which giant banks and conglomerates own huge chunks of one another's shares, is breaking down, leading to greater outside ownership. That makes it easier for investors to put pressure on underperforming managers.

--Japanese companies have begun reaching out to U.S. investors. Some are even bringing road shows to America so mutual-fund companies and other analysts can learn more about them.

Mind you, Japan's problems are still awful: relent-less deflation that drives down real estate values and prevents companies from raising prices; government debt that amounts to 158% of the gross domestic product (vs. 59% in the u.s.); banks that stifle entrepreneurship through their reluctance to lend money; and a government too paralyzed to mandate real reform. But as Canadian money manager Peter Cundill says, such a grim time "is exactly when you should consider investing, since buying a stock or a market at a low point nearly always works in the long run."

Besides, "even if you thought the U.S. was headed in the wrong direction, you'd probably still want to hold Microsoft," says Laurence Siegel, who helps run the $10 billion endowment at the Ford Foundation. "Likewise," he adds, "Toyota is the world's leading automaker, and Sony is the dominant firm in consumer electronics. you don't want to pretend they don't exist just because they are based in Japan."

Cundill, who runs Ivy Cundill Global Value Fund, is hooked on Nintendo. The maker of Game Boy, says Cundill, has a "pristine balance sheet." among lesser-known stocks is Takeda Chemical, a pharmaceutical maker that "allocates capital intelligently," says David Herro, manager of Oakmark International Fund. Tweedy, Browne's Shrager likes Eisai Co., another drug company, which he reckons is trading 30% to 40% cheaper than the shares of leading U.S. drugmakers.