Rediscovering Japan

New shareholder-friendly policies should boost the country's stocks.

- KIM CLARK

THE last time the Japanese stock market truly sizzled, you could buy a U.S. postage stamp for 25 cents (less than half the cost now) and George Bush (the first one) was in the White House. The Nikkei Stock Average fell more than 75% from its December 1989 peak through September 2012 and still trades below its 34-year-old high.

But many experienced investors, including Warren Buffett, are returning to the market, an indication that it might be time for U.S. investors to rediscover what is, after all, the world's second-largest stock market and third-largest economy. Especially now, "Japan should be part of your portfolio," says Matt Lamphier, director of research for First Eagle Investments, an investment management firm.

The brave souls who bought in a decade ago have profited handsomely. The 225 stocks in the Nikkei have returned more than 11% annualized, on average, about double the return of the MSCI EAFE index of companies based in developed nations outside the U.S. And since the beginning of this year, the Nikkei's 28.3% total return is handily beating the S&P 500's 20.7% (Prices, returns and other data are as of July 31, unless otherwise noted.)

The momentum should continue, says Jeffrey Kleintop, chief global investment strategist at Charles Schwab. It's true that Japan's aging demographics will likely keep economic growth modest. But the government's long effort to strengthen the economy and stanch deflation appears to finally be working. Prices and wages in Japan have started rising. The country's gross domestic product is on pace to increase 1.4% this year. Efforts to broaden global supply chains beyond China are sparking new foreign investment in Japan. And many Japanese companies are finally responding to pressure from investors and stock exchange overseers to return more profits to shareholders.