My starting point this month is the news that New Star is to merge its Japan fund into its Pacific Growth unit trust.

It is not uncommon for fund management groups to merge relatively small funds that are no longer cost-effective into larger ones, and at £5.5 million New Star Japan is dwarfed by the fund it is being merged into, already at over £100 million.

New Star also draws attention to the fact that investors in the merged fund will have a much broader, Pan-Asian portfolio, rather than a single-country fund, and, what is more, a fund whose single-country has been rather disappointing for the best part of two decades. In fact, New Star Pacific Growth will stick to its existing investment policy and not include Japanese stocks at all.

Asian growth story
The reason for this is simple. The Asia-Pacific (excluding Japan) open-ended fund sector has comprehensively outperformed the Japan sector over just about any period you care to name. Over one, five and ten years respectively to 30 April, the average outperformance is  26.6 per cent, 140 per cent and 170 per cent, in favour of  the regional funds in each case.

Indeed, the long-term performance of the Japanese market is so poor that the first question I ask any manager of a Japan fund brave enough to permit an interview is what on earth possessed them to take the job in the first place (the answer is usually that they studied Japanese at university and wanted to do something with it!).

It was not always like this. There was a time when Japanese funds led, rather than lagged, the rest of the market. Indeed, if you had been invested in the Japanese stock market for the past 30 years and your returns had matched those of the main Japanese large-cap index (the Nikkei 225), you would now be sitting on a profit of around 150 per cent in sterling terms.

A very long tail
That doesn’t seem too bad until you place it in context. Over the first 10 and a half years of that period, the Nikkei 225 was up nearly 600 per cent, peaking at around 39,000 in December 1989. Since then, the trend has been dramatically downwards, despite occasional rallies, such as mid-1996 and the tech bubble in March 2000 (and on both occasions the index peaked at just over half the level it reached in 1989), so that it currently stands below 14,000 – or roughly 75 per cent below the peak nearly two decades ago.

How has this come to pass? It is worth remembering that, 40 or more years ago, Japan was effectively an emerging market. Just as with Germany in a European context, post-war reconstruction meant literally starting from scratch. But in Japan’s case, not only did this involve adopting the most modern, technologically advanced production methods, but also having a vast pool of cheap labour available.

And it was this that was at the core of the Japanese economic miracle of the 1970s and 1980s. Japan outstripped its competitors because its labour costs were so much lower, in spite of the fact that its economic organisation was the most inefficient on Earth.

A long, hard lesson
For those of us who grew up believing that Japan was a wonder economy, a visit to the place was enlightening.

I went there in 1995, just as the Japanese themselves were starting to realise that the good times were over and they could no longer carry large numbers of unproductive workers.

I am told things have improved over the past decade, but the collective reluctance of the Japanese to reform their economy goes a long way to explaining why their stock market is a perennial underperformer – and why fund managers prefer to invest in Japan’s emerging neighbours who can undercut her labour costs, avoid her wasteful economic structure and deliver stronger growth as a result.