Since its low on 10 March the Topix has bounced 31.7 per cent, and gained 7.4 per cent year-to-date according to figures published by the Financial Times as of 29 June. This is in contrast to the S&P 500 and FTSE EuroFirst 300 which have gained 27.9 per cent and 23.5 per cent respectively between these dates.

Scott McGlashan, senior fund manager on the JOHCM Japan Fund, argues that Japanese stocks are now priced for recession so if the world economy worsens it is priced in, but if it improves then investors are getting very good value with this market.

The JOHCM Japan Fund, according to Trusnet data, has the second highest total return of 119 offshore funds over one and  five year periods with 13.7 and 22.5 per cent returns, while over three years is fourth best on -7.8 per cent.

Stocks have a price to book ratio similar to levels last seen in June 1965, partly because Japanese companies do not revalue their assets but keep them at book value. McGlashan said, for example, said that around 21 per cent of shares on the Topix are trading below book value with net cash on the balance sheet, in contrast to around two per cent of the FTSE All Share, and 1 per cent of MSCI Europe.

Ruth Nash, co-fund manager of JOHCM Japan Fund, said the market as a whole is undervalued and this is particularly the case in the second section of the Tokyo Stock Exchange. However, this fund is less exposed to this as it does not hold stocks with a market cap of less than £100m, and no more than 25 per cent of the fund is in stocks less than £500m.
 
This is because these companies are less liquid and the fund avoids stocks that cannot be sold in three to five days.

Coprorate Japan, McGlashan argues, is in good health as companies have reduced debt to levels last seen in the 1960s while nearly half of listed companies have net cash on their balance sheets. This is evidenced by an increase in bids for listed companies with the pace maintained over the first five months of the year.

Japanese companies are typically more conservative than their western counterparts in terms of debt so are not suffering from the credit crunch. And in 2008, for the first time since the 1990s, Japanese institutional and retail investors were net buyers of the stock market as domestic yields improved relative to overseas markets.

McGlashan said domestic investors are a reliable indicator of when to buy and sell whereas foreign investors tend to buy at the top of the market. Ben Yearsley, investment manager at Hargreaves Lansdown, suggests that most UK investors are likely to miss the upturn because they have been put off by so many false dawns.

Meanwhile Tom McGrath, fund manager of the Apollo Balanced Fund recently said: “The opportunity is there to make significant money from this forgotten market. Japan in my belief has the necessary building blocks for a new bull market to get underway, namely attractive valuations, available liquidity, market leadership and an improving global economic outlook.”

At 13 per cent, Japan is the largest geographic exposure in this portfolio. In addition, Ruffer Investment company has its largest equity exposure in Japan, accounting for 17 per cent of its assets.

However, Martin Bamford joint managing director at Informed Choice, notes that the recent rally means that Japan is more expensive than six months ago, and three months ago might have been a better time to enter the market. He said currently he takes a neutral stance on Japan and typically would not put more than three to five per cent of a client’s assets into this market, and has no plans to change that over the next three months.

He also notes recent concerns of the Tokyo Foundation research institute that a housing loan default problem is possible in industrial areas.

Yearsley said: “I like Japan because there is so much opportunity and when it turns it will fly, but when? I have invested there for a long time and am continually disappointed.”

“Investors have to be prepared to be patient and should probably invest a bit each month as the market is both volatile and has disappointed so many times. It is definitely a long-term option.”

McGlashan feels that another advantage of Japan is that it can be used as a proxy to gain exposure to Chinese growth while investors in exporters are increasingly less likely to suffer from the US downturn. He notes that in May, for example, Asia accounted for 55 per cent of Japanese exports while the US accounted for less than 15 per cent.

He said: “There is much high value manufacturing, and research and development in Japan while this country is very well integrated within Asia.”
 
However, he said that JOHCM Japan Fund does not have much exposure to exporters, although it generally takes a bottom up approach.

This is similar to the view of Osamu Tokuno, manager of the Invesco Perpetual Japanese Smaller Companies fund, whose investments include companies that will benefit from trade with China.

Yearsley said that although Japanese growth is not as strong as other parts of Asia including China it has better standards of corporate governance.