Most people have given up on investing in Japan.
With an aging population and far too much government debt, the conventional wisdom is that Japan will never again see the vigorous economic growth it once enjoyed.
The earthquake and tsunami of March 2011 only reinforced this view. However, that tragic episode did have another side.
It showed the resilience and discipline of Japanese society.
There was almost no looting, for example -- and recent economic data suggest that the Japanese economy is not as dead as it seemed.
First quarter Japanese gross domestic product (GDP) came in at an annual growth rate of 4.1% --far higher than the United States, Canada, Australia, or anywhere in the Eurozone.
Given that Japan has been in perpetual near-recession for 21 years, with no surges of productivity like the U.S. enjoyed in the late 1990s, it's really not a bad performance.
You can also see Japan's true strength from its exchange rate, which is currently 79 yen to the dollar, up from around 120 five years ago. That makes visiting Tokyo very expensive.
However, it's also sign of a highly competitive economy.
Investing in Japan: What You Need to Know
It's notable that observers in the United States, a country which perpetually runs payment deficits of $500 billion-$600 billion annually, sneer at the economies of Japan and Germany, which are almost always in surplus.
Before 1995, I lived in another economy that was similar. Britain ran deficits much like the U.S. does.
So believe me when I tell you, deficits are not exactly a sign of superior economic health.
The reality is that Japanese and German products and services are highly competitive, both in advanced economies and in emerging markets. Conversely, U.S. exports are not as competitive except in a few sectors.
Even so, the Japanese stock market is still trading at less than a third of its 1990 peak.
However, that's no longer something to sneer at since the S&P 500 is also trading well below its 2000 peak.
The reality is that speculative bubbles such as that in Japanese stocks and real estate in the 1980s and U.S. stocks in the 1990s and housing in the 2000s are enormously damaging. The after-effects can last for years, or even decades.
Truly Alan Greenspan, Ben Bernanke and their 1980s Japanese counterparts have a lot to answer for.
These quasi-politicians at central banks should not be allowed to play games with the money supply. Rather, they ought to adopt an automatic system such as a gold standard.
Of course, it's all very well quoting the superior returns over the long term from equity investments. But the truth is, we have finite lifespans.
An investment in the U.S that loses money for 12 years and counting -- or 22 years and counting in Japan -- is not very attractive as a means of saving for retirement (unless you're 25).
Nevertheless, while the tunnel may be a long one, it is not an infinite one. Today in Japan there are signs we may be emerging from the other end.
Robust growth is the means by which both Japan and eventually the U.S. will emerge, which will reduce the excessive debt levels in the system and allow equity and other asset values to start increasing again.
Naturally, the politicians have to stop running huge deficits in order for this to happen, but in Japan this may finally be happening, with the government proposing to double the consumption tax to 10% in two stages by 2015.
Two Ways to Invest in Japan
Since Japan's export sector is hampered by its high exchange rate, the best Japanese investment would focus on the smaller companies. Such companies benefit from domestic growth and are themselves suppliers to the export giants.
The SPDR Russell/Nomura Japan smaller companies ETF (NYSE: JSC), for example, has now been running since 2006 and has an expense ratio of a modest 0.56%. It looks to be an excellent way to tap into Japanese small company growth.
Alternatively, you should consider investing in the Japanese financial sector, which has major growth opportunities in Asia and has avoided many of the problems of the 2008 meltdown.
In this area the best-capitalized company is Orix Corporation (NYSE: IX).
Orix, originally a leasing specialist, has expanded into most sectors of commercial and investment banking, with an emphasis on investment rather than trading. It has capital of around 15% of assets -- nearly double the capitalization ratio of most banks, in Japan or elsewhere.
What's more, Orix is trading on a P/E ratio of around 10 and at 53% of book value. For Japanese-minded investors it's also a bargain.
After a long downturn, Japan is poised to rebound. The conventional wisdom, as is often the case, is wrong.
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