The Nikkei 225 index has picked up 30.55 per cent so far this year, compared with gains of 27.98 per cent and 13.85 per cent from the FTSE All Share and S&P 500 respectively.
Year-to-date performance of indices
Source: FE Analytics
Often after a country or stock has seen strong gains, investors would do well to take profits and reinvest them in more out-of-favour areas of the market.
Peter Lowman, chief investment officer at Investment Quorum, says he is even more positive on Japan than ever and has started increasing his exposure to the country.
"We decided that we would re-allocate money from bonds to equities and we favour developed markets more than developing ones, which are suffering from the rise of the strong dollar," he said.
"We’re thinking about increasing our weighting to Japan, the UK and Europe. Japan in particular has had a great run, but that’s mostly down to Abenomics."
"The next leg-up for Japan is that the yen has retaliated [to US monetary policy] and weakened considerably. This is a big positive for corporates in Japan who are exporting goods to the wider world. The next leg-up will be a corporate-driven earnings story."
He adds that the dip last month offered his first opportunity to push into the country, but that he is holding some funds back in anticipation of another drop.
"If you’re in the markets for the longer term – say three to four years – a dip in Japan in the next few weeks could be an excellent buying opportunity," he said.
Lowman is confident Japan can sustain its bull run of this year and predicts the index could soon hit levels as high as the top teens, and above the 20,000 mark by 2014.
"The probability of Japan extending this run is pretty good," he said. "But we have had false dawns before."
"It’s been a volatile run, we had a big spike up and an interesting dip last month. We’re going to be pretty patient, but we’ve got our foot in the door."
"If we get more of a green light in Japan, a lot of money would go there. But we’ve all had our fingers burned over the last 10 or 12 years by false dawns."
Lowman tips three funds in Japan that he thinks will be able to deliver even greater returns than the wider market.
Baillie Gifford Japanese
One of the funds Lowman is considering adding to is the four crown-rated Baillie Gifford Japanese, run by Sarah Whitley and Matthew Brett.
The £268.6m fund is a top-quartile performer in the IMA Japan sector over the last one, three, five and 10 years.
Since Whitley took the helm in November 2007, it has picked up 67.29 per cent, compared with 36.91 per cent from the sector.
Performance of fund vs sector and index since 2007
Source: FE Analytics
It has been slightly more volatile than the sector over the period, which Lowman says is to be expected considering the managers' aggressive approach.
"If things start to get even better, this fund is a tad more punchy," he said.
It is invested in a mix of consumer and industrial blue chip Japanese companies such as Nintendo, Japan Tobacco and Fuji Heavy Industries.
The highest weighting in the fund is to industrials, at 28.1 per cent.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.53 per cent.
Jupiter Japan Income
The £597.6m Jupiter Japan Income fund is another one Lowman likes. He says it is particularly useful for investors looking to diversify the source of their income.
Lowman says manager Simon Somerville’s fund has been a stalwart in Investment Quorum's models for nearly five years, adding: "He’s very good at managing money in a bear market."
Lowman says combining the Jupiter Japan Income fund with something like Baillie Gifford Japanese would be particularly useful because the different management styles can make money in varying market conditions.
Although the fund has lagged its peers of late, it has outperformed both the IMA Japan sector and TSE Topix index over five years, delivering 49.52 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Its strongest performance came in in 2008 when it gained nearly 6 per cent. The sector lost 2.39 per cent that year while the index picked up just 1.32 per cent.
The fund also saw strong outperformance in 2010.
It is yielding 2 per cent.
The fund requires a minimum investment of £500 and has ongoing charges of 1.75 per cent.
iShares MSCI Japan index
For investors who do not have enough conviction in a management style, Lowman says an inexpensive tracker fund such as the iShares MSCI Japan Index offers one of the best ways to access the current strong returns of the Japanese market.
The exchange traded fund (ETF) has ongoing charges of just 0.54 per cent. It has tracked the MSCI Japan index with an error of just 3.47 per cent over the past three years.
"We like to have one or two trackers in a portfolio, purely because sentiment is difficult to call, but we want to be in that market," he said.
"Trackers keep our clients in the market and we can add active managers around that depending on how things are panning out."
The iShares tracker has marginally underperformed the index over the last one, three, five and 10 years.
Over the last year, the fund has gained 29.01 per cent while the index has made 33.53 per cent, according to FE Analytics.
