Japanese equities have seen huge inflows over the past year as money has been sucked out of Europe, the UK and the US, according to IMA figures. 

Money has also been flowing into emerging market, Asian and globally focused funds, but Japan is the surprising addition to that list, as a developed market with well-known demographic and debt-related issues. 

Inflows into equity funds by region

Region	Net retail sales - last 12 months
Global	£2.6bn
Japan	£240m
Asia	£80m
Europe	-£1.8bn
UK	-672m
North America	-126m

Source: IMA

Data from FE Analytics shows that the IMA Japan and IMA Japanese Smaller Companies sectors are among the few to have a low correlation to the most popular sectors such as IMA UK Equity Income, suggesting they offer investors good diversification benefits. 

Over the past three years the IMA Japan and IMA Japanese Smaller companies sectors have a low correlation to all the other IMA sectors, with a score between -0.29 and 0.7.

Correlation of selected sectors over 3yrs

Name	IMA Global Equity Income	IMA Sterling Corporate Bond	IMA Sterling Strategic Bond	IMA UK Equity Income	IMA UK Index - Linked Gilts
IMA Japan	0.52	0.03	0.14	0.52	-0.10
IMA Japanese Smaller Companies	0.35	-0.01	0.06	0.37	0.01

Source: FE Analytics

Richard Troue, investment analyst at Hargreaves Lansdown, said: "The country has been hit by everything that has been going on in Europe, but it is sheltered to some extent because a lot of Japanese companies are managing to capture growth in Asia." 

"Fifty-five to 60 per cent of Japanese exports are going to Asia and emerging markets rather than Europe or the US." 

Troue admits that there are serious issues in the Japanese economy, and this was highlighted this morning with the news that the Japanese government could effectively run out of money in a month.

Opposition politicians are blocking a finance bill, meaning that the country is facing a "fiscal cliff" similar to that threatening the US. 

Troue says that it is the quality of the companies and the cheapness of the market that is making investors look past these issues.

"A price-to-book of less than one is extremely low, and so investors seeking value have been looking to Japan." 

"It’s a developed market with high quality companies that are quite likely to capture long-term structural trends, so investing now with a 10-year view could be a good decision." 

"The drive to emerging market growth is relentless and a lot of Japanese companies are capitalising on growth in Asia in particular." 

"If you look at car manufacturers for example, the Asian consumption story is only just beginning. Honda, Nissan and Suzuki are all good companies that are seeing strong growth." 

Ruffer’s Steve Russell is among the growing number increasing their allocation to Japan. The FE Alpha Manager has 22 per cent of his Ruffer Investment Company, making it his biggest equity weighting.