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Despite market turmoil spreading as far Japan, the land of the rising sun is proving resilient. Russ Mould looks at its lost decade and the lessons it has learnt

If you think the FTSE 100’s 10% January swan dive has been no fun at all, you should try investing in Japan. Japan was the worst performer among the G7 countries in 2007 (see table) and January’s 12% further plunge has taken the headline Nikkei 225 index into bear market territory, since it lies 26% lower than summer 2007’s previous peak of 18,261.9.

Yet this did not dampen enthusiasm for the Japanese market at a packed investor conference last week, hosted in London by the Japanese Securities Dealers Association (JSDA) and the International Capital Markets Association (ICMA).

Market deregulation, a more receptive approach to hostile merger and acquisition activity, improved accounting transparency and rising share buybacks and dividend payments all suggest Japanese companies are becoming more shareholder aware.

More importantly still, the twenty first century has seen the Japanese economy emerge from the debt quagmire into which it fell at the end of the twentieth.

‘The economy has come back,’ Professor Heizo Takanaka of Keio University proudly announced, who served as Minister for Economics under Prime Minister Junochiro Koizumi during 2001-2004. ‘Japan has enjoyed five consecutive years of average GDP growth exceeding 2%, the longest run in its history.’

This might not seem immediately relevant to today’s stock market woes in the West. But Japan suffered its own credit crisis throughout the 1990s, one that had its origins in excessive borrowing and rampant speculation in the property and equity markets, and one that resulted in hundreds of billions of dollars’ worth of bad debt write downs by local banks.

Japan’s Nikkei 225 peaked at 38,915.9 in 1989 and troughed at 7,607.9 in 2003, a horrendous 80%, fourteen-year fall. Property prices fell 85% even though interest rates were held at zero for five years at one stage, and still stand at just 0.5% now.

Koizumi and Takanaka’s cuts in public spending, particularly on unnecessary construction projects, and then 2002’s banking reforms helped Japan emerge from the ‘Lost Decade’, as the 1990s are known.

‘The lost decade is over and now we can promote proactive reform for increased economic growth,’ argued Takanaka before a huge audience. ‘The USA enjoyed the peace dividend and now Japan can enjoy the reform dividend, in a rising tide scenario. If Japan can realise this scenario, investors will buy Japan. If not, they will sell. It’s simple logic,’ he said.

The good news is, as Takanaka puts it, ‘The US sub-prime crisis is not Japan ten years ago.’

But Japan’s torrid experiences show it can take more than just a few interest rate cuts and fiscal stimulus packages to turn things around once a credit bubble has burst.

Investors in the West must therefore remain on their guard, although since the JSDA-ICMA conference ended, the Nikkei 225 has already rallied 7% from its year low of 12,573.05, so Takanaka’s optimism was clearly infectious.

Political instability and a rising yen, which could hurt exporters’ competitiveness, remain key threats but Japan’s lessons from 1990s mean it is better prepared for the current credit crunch than most.

‘Japan could come out of the financial crisis well, as this is a Western issue,’ said another conference participant, Julian Jessop, chief international economist of Capital Economics. ‘Japanese money markets have shrugged off the credit crisis and the Tankan shows liquidity is accommodative.’

Shares says: Too early to buy into a global rally with conviction, but Japan should be a beneficiary of any sustained run.