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The Japanese stock market has been about the worst performing major stock market index one can find over the last 10 years. However, now might finally be the perfect time to buy Japan. The chart below shows Japan's Nikkei 225 Index (blue), Dow Jones Industrial Average (orange), and Germany's DAX (green) over the last 10 years.

(cnbc)

click to enlarge

Over the last 10 years, Japan was down about 20% while the U.S. and Germany were both up about 20% each. The Japanese economy has suffered the continued effects of deflation for over 20 years now after its asset bubble popped. While Japan has maintained low interest rates essentially at 0% since 1996, this has done little to help the Japanese economy. Japan has also engaged in massive banking bailouts in hopes of saving the economy; this too has done little to help the Japanese economy. Interestingly, these policies seem to be exactly what policy makers in the U.S. and Europe are in the midst of implementing.

The Federal Reserve has maintained interest rates at 0-.25% since 2008, and the U.S. Government also implemented a major bailout of the banking system in 2008. However, like Japan, these policies have failed to help the economy much. U.S unemployment has remained near 9% down from levels seen in 2008, but not by much. Europe is beginning to go down the same road that the U.S has. The ECB has started cutting rates to battle the sovereign debt crisis, and a banking bailout seems inevitable. These failed policies are likely to weigh on stock prices in the U.S and Europe as they have already done so in Japan. For this reason, Japan is the better place to invest now.

Valuation
The Nikkei 225 is trading at just 10 times forward earnings projections and has a dividend yield of 2.3%.

Jim Rogers on Japan:

First of all you should not believe all what you read , what I said about Japan was that the Japanese stock market today is where it was in 1983 that's 28 years ago that's a long long time ago so things are very cheap , now the reasons that they are so cheap it seems to me that Japanese has reoriented itself, the Japanese stocks are now a way to play Asia and to play China so it is a great buy in Japan, it is cheap they reoriented the economy...I am not given up on Japan at all but I would only own Japan for a year or two or three. (full video)

How to play it
One way to buy Japan is to buy the JSC ETF. This is not the most well known Japan ETF, but it has been a much better performer than the more well known EWJ. The chart below shows JSC (blue) vs EWJ (orange) in 2011.


(cnbc)

JSC did considerably better in 2011 than EWJ. The trend of small caps outperforming large caps is a trade that looks like it will continue into 2012.

For this reason, I would rather not own the Japanese companies that trade in the US as they tend to be the largest Japanese companies. Specifically, I would avoid the three companies mentioned below because they are large exporters. The strength of the yen is an attitudinal headwind that these companies face.

Sony (SNE) - major exporter
Toyota (TM) - major exporter
Honda (HMC) - major exporter

For Short Term Traders
EZJ: This is the leveraged ETF that offers 2x long exposure to the MSCI Japan index. (EWJ is the non-leveraged play on the MSCI index.) EZJ will provide the most upside for short term moves, but over the long term the issues with leveraged ETFs make it so EZJ is not a good investment over the long term.

Source: Japan: A Good Place To Invest