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Despite market volatility, Japan has delivered handsome returns in recent years, so is it time for investors to put their prejudices to one side and hit the road?

Fund trends Japan

Japan remains an area of the market that many investors are hesitant to significantly overweight on, given overhanging memories of burnt fingers following the bursting of the country’s asset bubble in the early 1990s.

Positive sentiment towards Japan has been building for a number of years now, following the election of Shinzō Abe as prime minister in September 2012. Abe’s landslide victory came after a campaign that promised ‘three arrows’ to kick start the country’s flagging economy.

These ‘arrows’ can be broken down into monetary expansion aimed at achieving a 2% inflation target; a flexible fiscal policy to create economic stimulus and a budget surplus; and a programme of structural reform and private sector investment. Abe’s strategy has achieved some success.

While inflation remains sluggish (the latest reading was far from the 2% target at just 0.3%), preliminary data for the first quarter shows the economy grew by an annualised 1%. Admittedly, this was a downgrade on a previous estimate of 2.2% expansion but it is still above the country’s long-run potential of 0.7%. Analysts also point to a number of other positives such as falling unemployment and wage growth.

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