Sentiment on Japanese investments is changing as IFAs and fund managers alike see money-making opportunities in the geography.

"Japanese managers are always bullish about Japan, and always say it is cheaper than it ever has been. However, investment in the region right now is cheap, not just by historical standards, but in global terms. There are fantastic companies in which to invest, too," Tim Cockerill, head of investment research at Ashcourt Rowan, said.

His comments came as Japanese fund managers say they find value in small caps.

"I have moved my fund to be overweight in small and micro caps in Japan, as they are very attractively valued right now," said Andrew Rose of Schroder Japan Growth.

John MacDougall, who manages the Baillie Gifford Shin Nippon Investment Trust, also favours small caps, particularly those which appeal to the specifics of Japan's economy; an aging society, innovative online business models, and outsourcing.

He has taken up holdings in Message, residential homes for the elderly, and Start Today, an online clothes retailer, as well as Hamakyorex, a third party logistics firm.

It is not just Japan managers who are finding value in the geography, however.

Trustnet Alpha Manager Rob Hepworth added six per cent exposure to Japan in his Ecclesiastical Amity International fund at the start of the year, having previously been very negative on it.

"The price-to-book value of Japanese companies now shows them trading at half the value of the US. With such good value to be had on world leading companies we are eager to continue to build on our exposure to the region,” he said in an interview with Trustnet.

MacDougall pointed out that there are very few analysts who focus on small caps in Japan, making it an often overlooked area.

"As long as a company is at the top of its industry, or has a special niche, it will be an interesting investment," he said.

Brian Dennehy, managing director at Dennehy and Weller is also warming to Japan.

"Where we in the west are only just beginning to adjust to debt problems and deficits, the Japanese have been doing so for 20 years. Japan is seeing a new generation of managers coming through at the company level who are adept at managing with debt. We are very happy to buy into Japanese smaller companies, but not with lump sums,”

The managers and IFAs are keen despite ongoing concerns on the yen, Japanese bonds, and the rate of inflation in Japan.

"Just because markets are dropping in a country doesn't mean you can't make a good profit on assets which are listed there," MacDougall points out.

Rose makes a similar point: "There is no reason not to gain profit because of deflation."

Performance of MSCI indices over 2-yrs


Source: Financial Express Analytics

Rose believes Japan is in the midst of a strong profit rebound, which means dividend yields which were disappointing are on the verge of rebounding.

"The profits background is positive, which could then flow through to dividends," he said.

Glancing at index data for Japan and the UK, the MSCI Japan Small Cap index has returned 26.1 per cent to investors in the past 24 months, beating not just the MSCI Japan sector, but the FTSE All Share, as well.

Performance over 1-yr



Source: Financial Express Analytics

Both the Shin Nippon and the Japan Growth Trust have outperformed their respective Japanese Smaller Companies and Japan sectors, but each took on more risk in order to do so.

MacDougall, whose fund means "New Japan" in English, says there are reasons to be positive on the outlook for the country.

"Politics in Japan is changing, with all of the big parties who are competing for election glory right now promising some kind of tax reform. Around 71 per cent of Japanese companies pay no tax at the moment, but that is set to change," he said.

He adds that Japan is increasingly attractive to the rising population of Asian wealthy, who see it as a status symbol to visit the country.

Not everyone is keen to invest in Japan, however.

In an article for Trustnet, Midas Capital Partners' investment manager Mark Wright outlined the macro reasons for negative sentiment in the country.

And some IFAs say this overwhelming data will kept them negative on Japan for some time.

"We have yet to be convinced of the case for Japan by anybody. While we do have a little exposure via our multi-manager funds, we prefer Far East ex-Japan for returning value to investors," Chris Wise, IFA at Bentley Jennison said.