For an earlier generation of investors, Japan was the greatest place to put your savings. Fund pioneers, such as Sir John Templeton, Tom Griffin and Richard Thornton, made great returns for investors in booming Tokyo shares from the 1960s to the 1980s. For UK investors, appreciation of the yen multiplied gains.

Since the Japanese market peaked 18 years ago, when its value was briefly more than New York, the story has been different. Within three years the Tokyo stock exchange index (Topix) dropped by 40 per cent. Like the momentum of the Japanese economy, it has never recovered.

Most UK investors have fared worse even than the index by buying at the wrong times. Cruelly, the years of gloom and deflation were punctuated by a series of false dawns. Output turned up and so did the stock market. But in each case, something happened to stall the advance.

Banks’ bad-debt problems starved business of credit. Then consumers were stopped in their tracks by a spending tax, intended to stem a surging national debt. Then interest rates were put up too early. In reaction to that, zero official interest rates were kept too long in the current upturn.

In each episode the Topix index peaked at a similar level, roughly 1,750, making that an ever-stronger resistance point, prompting the short-term traders who came to dominate the market to cash up. This pattern made Tokyo a nightmare for genuine investors. Typically, we invested when we felt confident that the market was finally breaking out of its range, only to find that it quickly stopped and retreated.

Mike Lenhoff, now chief strategist at Brewin Dolphin, the broker, writes: “As a member of several asset allocation committees over the years I recall a certain dynamic relating to the Japanese equity market during the 1990s.” Fortunately, he says, it was unique. “Each time the story differed. Each time it excited. Each time the weighting to the Japanese market was raised and the rebound chased.” But each episode ended in disappointment.

No wonder he and others are diffident about hailing the latest Topix advance. By the end of February it reached a heady 1,816. Surely it would break the 15-year barrier.

Then came the Shanghai shake and the Topix was back to 1,700. Mr Lenhoff, though suitably sceptical, argues that this setback was global and should not be taken as a sign that Tokyo will relapse again. Most of the factors that have held back Japanese shares all these years are now behind us.

Output grew 4.8 per cent last year, consolidating a four-year recovery. The balance sheets of top banks are strong again and profits are growing at a sustainable pace, maybe 10 per cent this year. Land prices are also rising again.

Growth still depends too much on exports, but exports to Asia are now the most important, with China providing the growth. Rob Weatherston, who runs Merrill Lynch’s Black Rock Japan Value Fund, argues that average sales growth of 8 per cent at big companies presages further profit rises and speculates that Japan may see a bout of private equity bids “driven by very cheap financing growth and substantial scope for easy gains through corporate restructuring”. If foreigners borrow cheap yen to buy high-yield dollar bonds (the carry trade), they may use it to asset-strip corporate Japan.

Yet there must still be doubts. There is credit to finance rising asset prices but deflation is not yet past. After edging up last year, consumer prices were lower in February than a year earlier. That helped consumer spending to recover in real terms but the impact of policy is uncertain. The Ministry of Finance restrained the Bank of Japan from tightening money while it cut back public spending to ease the budget deficit. So the first move, to a 0.25 per cent interest rate, came only in February and rates are unlikely to top 1 per cent by year end.

In Japan, ironically, higher interest rates should boost consumer spending because most people have deposit accounts rather than big debts. But higher rates should also reverse the decline of yen real exchange rates, now at their lowest for 20 years. Japanese share prices usually rise when the yen falls and vice versa.

Japanese shares trade at an average 22 times earnings. That is modest compared with local bond yields, let alone the fantasy ratings of the 1980s. But Japan is now as mature as Germany. On that test, the market does not look cheap.

If the Topix can hold above 1,800 for a few weeks, momentum should make it worth following, but you may think that there are attractive markets with fewer ghosts to exorcise.

graham.searjeant@thetimes.co.uk

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