Despite structural issues in the market, there is value to be found in Japanese equities, according to Threadneedle.

Ian Burden, Head of Japan, Threadneedle, said, ‘In general terms we have a positive view of the prospects for the Japanese equity market this year. It's important to be clear, though this optimism is based on a benign to positive outlook for the global, and most particularly the Chinese economy, and it also represents a bullish view from a cyclical perspective. Structural issues remain.’

As a deeply cyclical industrial economy Japan was very negatively affected by the collapse in global demand in 2009.

As with Germany, net exports is a key driver of growth in Japan and this feeds through to industrial production, capital investment and finally to wages and consumption.

Burden and his team are now witnessing a positive recovery in these trends, which he believes is likely to continue over the next eighteen months.

He added, ‘Exports are recovering strongly, particularly to China, which including Hong Kong now accounts for 25 per cent of Japan's exports. In addition we are seeing a pick up in domestic capital investment, as the linkages with industrial production work through the economy. This is leading to fairly meaningful increases to forecasts for growth for 2010/11.

‘Given that the corporate sector has aggressively cut costs over the last year, (earnings were negative in the fiscal year to March 2009) we expect a strong earnings recovery, starting March 2010 and continuing to March 2012. Strong balance sheets, partly supplemented by large equity issuance in 2009, leaves the corporate sector well placed to fund expansion without further capital raising.’

Burden concluded, ‘Our earnings expectations have the market on 13 times March 2012, and whilst that may be a cyclical peak this time frame is coming within the range of the market, in terms of potential positive catalysts. Although a weaker yen would reduce returns for an un-hedged overseas investor, it would provide further earnings leverage to our expectations for the export sector, whilst moving the domestic economy towards recovery.’