After a generation of false dawns, is the sun starting to shine on Japan?

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Looking around in the late 1980s for ways to put off getting a proper job, there seemed nowhere better to go than Japan (EUREX: FMJP.EX - news) .

One of my professors waved me on my way with the words: “I’ve seen the future and it’s Tokyo”. There didn’t seem any reason to disagree and I was not the only one following the money by getting on a plane to Narita.

If I’d known anything about investment bubbles I might have been surprised that an unqualified and completely inexperienced English teacher was being flown business class and put up for a week’s induction in a fancy hotel. Japan had decided that its new-found position at the economic top-table meant it needed to speak better English and it was prepared to pay whatever it took to get there.

The rest, of course, is history. Since then the Nikkei (Osaka: ^N225 - news) has collapsed from a peak of nearly 40,000 to today’s level of less than a quarter as much. Japan has endured not one lost decade but two and become a case study for how not to handle a financial crisis. The past 30 years might just as well not have happened as far as investors are concerned.

After nearly a generation of false dawns, those investors have learnt to rein in their expectations. Well, they had until recently, when something suspiciously like optimism reappeared. Since Japan called an election a month ago, its stock market has risen by more than 12pc as investors have placed their bets on former prime minister Shinzo Abe being handed a second term some time today.

Abe has done that most un-Japanese thing of putting his head above the parapet and promising change. Specifically, he has set out a pro-growth, inflationary programme of stimulus that his supporters hope might finally lift Japan out of its debilitating deflation.

Printing money and setting off on yet another spending spree of public works would usually set alarm bells ringing in a country that is already drowning in debt. But Abenomics, as his programme is known, has been welcomed in the markets, if less so at the central bank, whose first test of independence under the new government will come this week.

The prospect of an Abe-led Liberal Democrat government has seen the stale bulls of the Japanese market reheat their arguments. Their case hinges on the massive derating of a market which 25 years ago was the world’s most expensive and which today is one of its cheapest.

Smaller Japanese companies, in particular, have been described as the world’s most attractive asset. Trading at less than book value in many cases, investors could in theory buy a company on the stock market, sell all its assets and pocket the difference. The businesses using these assets are deemed to be worth less than nothing.

The trigger for those bargain-basement valuations to be rerated, according to the bulls, is a slump in the value of the yen, which would follow Abe’s proposed stimulus and which the currency markets have already begun to price in. The yen has fallen by 4pc against the dollar since the election was called.

I’m not so sure. The headwinds for the Japanese economy and stock market remain daunting and I don’t believe that a modest devaluation of the Japanese currency can make up for deep-seated demographic problems, sky-high public-sector debt and a fundamentally uncompetitive economy.

Nearly a quarter of the Japanese government budget is spent simply servicing the interest on its debts. And that is when the cost of 10-year government bonds stands at just 0.7pc. It hardly bears thinking about what would happen if the government were to hit its 3pc inflation target and interest rates moved in line.

A lower yen would obviously help, but the uncompetitive nature of Japan’s economy is deeper than this. Japan contracted for a second straight quarter in the three months to September and more shrinkage is expected in the current quarter.

But the biggest problem is Japan’s ageing population, which has financial as well as economic implications. There are too few workers supporting too many pensioners and not enough young buyers of the bonds their grandparents are now busy selling.

The contrarian in me wants to say the time has come to buy Japan. I know that the outlook is always this bleak at historic turning points. But my youthful enthusiasm for the place has gone.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63