Japan’s Nikkei 225 stock index peaked at 38,916 points on 29 December 1989, almost two decades ago. Since then, it’s been a slow, painful decline for investors in Japanese equities, with many false rallies along the way.

Market observer Dominic Frisby reminds us how treacherous a long-term bear market can be. “[So far] there have been at least six rallies that lasted six months or more, four lasting over a year. We had a 40% rally, a 50% rally, three around 60%, and even a 140% rally. Yet by late 2008, 19 years after the bubble burst, the Nikkei was below 7,000, some 80% off its high of 20 years earlier.”

Japan has lagged during this year’s equity market rebound, as well. Using the closing fund NAVs from 4 December, the iShares MSCI World ETF had risen by 26.5% in the year to date, while the iShares MSCI Japan ETF had managed a relatively paltry gain of 6% by comparison. (See the chart below, where both ETFs’ NAVs are rebased to 100 on 31 December 2008.  Both funds are priced in US dollars)

It seems that, in aggregate, global equity investors have abandoned hope that Japan will recover.

"Anything Japan, people don't like. They've given up on Japan as an investment destination," Gary Baker, head of European equity strategy at BofA Merrill Lynch, is quoted as saying in a recent Reuters report. Baker was commenting on his bank’s most recent investor survey, which showed that a net 30% of global asset managers had underweighted the country.

However, some country specialists are beginning to see signs that the long winter for Japanese shares could be approaching its end, even if this is still a contrarian view.

According to economist, commentator and Japan expert Andrew Smithers, Japanese shares stand out as one of the few major global equity markets offering value for investors. “Using long-term valuation models, the US market looks around 40% overpriced, most other major markets look more reasonably valued to slightly expensive, and the Japanese market looks cheap,” he said.

Andrew Rose, head of Japanese equities at London-based fund manager Schroders, concurs, pointing out that when compared to book valuations, Japanese stocks look cheap, small caps particularly so. “Based on the Topix index, the Japanese market has an overall price-to-book value ratio of around 1.1-1.2 currently, but a lot of small-cap names trade at a price-to-book ratio of under one.”

However, Rose reminds investors that some of the yield support for the Japanese stock market has disappeared over the last year. “The dividend yield on Japanese stocks got up to 3% in 2008, but with the credit crunch and a collapse in profits many companies cut their payouts, so we’re now down to about 1.8%. That’s still higher than bond yields, but disappointingly lower than a year ago.”

Looking ahead, recent political changes may signify that a tectonic shift is taking place in the way the country’s economic management is conducted, one that may mean better news for investors.

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