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"Japan's stock market is out of favor with most global investors. That's made it a bargain. Coming next: a rally." Barron's notes Japan's stock market's 12% drop this year, compared to gains of 3% and 4% in the U.S. and Europe, make Japan's current stock market cap as a percentage of its economy the lowest among G-7 nations. "It's hard to expect conditions to get worse," Shuhei Abe, one of Japan's most prominent investors, says. "This market is just outrageously cheap, relative to what reality is telling us. The negatives are already discounted. This country has the potential to grow corporate earnings better and faster than the U.S. in the next few years, and I don't want to underestimate the quality of earnings you can enjoy in this market."

Factors that could bolster the neglected market include a strengthening yen; a trend toward consolidation, coupled with foreign investment such as Citigroup's takeover of Nikko Cordial; a boost in leverage by companies that have previously shunned debt; and a growing dividend pool. Finally, Japan strategist Jonathan Allum of KBC Financial Products says the one metric with "an unblemished track record of spotting times to buy" -- when the dividend yield on Japanese equities (1.46%) exceeds the yield on government bonds (1.48%) -- is about to trigger (contrast with U.S. where equity dividend yield is less than half that of Treasurys). Popular U.S.-traded bets include Toyota (TM), Nomura Holdings (NMR), or broad-based funds like iShares MSCI Japan (EWJ) and Japan Small Cap Fund (JOF). (Barron's)

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Source: Japan on the Verge of a Rally - Barron's