GLOBAL - Fund managers and investors are turning their attention to the Japanese equity market again as some officials claim the economic downturn means larger Japanese firms may be better equipped to meet the pressures than in other countries.

Officials at Neptune Investment Management say they have increased their weighting within the global equity fund to multinationals and financial in the country as it is believed firms in this region may already have done much of the work needed to deliver profits in tough market conditions.

More specifically, it argues these firms survived during the Japanese downturn of the 1990s when business was slow, and the corporate management regime is likely to have learned from this period so is already trimmed the excess of its operations to deliver cost-cutting and efficiency - a prospect many other multinational operations will struggle with, according to Neptune.

The firm is said to be avoiding companies affected by domestic activity - largely because they are not expected to receive any support from the domestic economy and the negatively entrenched demographics - by buying into companies which dominate globally - such as electronics, toys, and advanced materials - alongside financial firms and real estate which have experienced this downturn before but can now tap the opportunities to be had now the US credit crisis is thought to be past its worst.

Neptune believes corporate earnings have now bottomed out as restructuring costs are incurred and the 2010 is likely to benefit BRIC countries within which Japanese firms are trading, while the yen has weakened and given firms competitive advantage.

It's a view shared in part by Colin Robertson, global head of asset allocation at Hewitt Associates, as his firm began recommending in autumn 2007 that pensions funds and institutional investors up their geographical weighting in Japanese stocks, though at the time this was partly linked to the strength of the yen.

The call to invest is not quite as strong as it was then, he argued, though Japan is still a market gaining interest from pension fund investors.

"It is the one market we picked out and said ‘you should be investing in a global mandate containing Japanese equities' or the one market where you should be overweight. That has worked out well to a considerable extent because the yen has been strong. And the reasons we gave at the time are relevant now."

He continued: "Japan has been less affected by the credit crisis than elsewhere. That still applies but it is less important because we are well through the credit crisis. The strength of the yen is a less forceful argument now. But there was always scope for corporate governance improvements."

Robertson said the consulting firm is still continuing to see interest from pension fund trustees about the prospect and practice of investing in Japanese equity, though he is less enthusiastic about whether improved corporate governance and operations planning are reason enough to be bullish.

"We have been recommending [Japan] and have seen interest from investors. A lot of the time we are happy to say there are opportunities in the market and fund managers are best-placed to pick up on that. The danger is, of course, they have been saying for the last 25 years that Japan could handle the downturn better. There has definitely action and a big recession is going to accelerate change," concluded Robertson.

The Nikkei 255 index is today lower than it was a year ago, at 9,796 points yesterday compared with 13,822 points on 26 June 2008, but its low this year was 7,054 points.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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