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Japanese stocks have been down since 1989 but are now ‘tremendously undervalued’ on metrics such as price to book value.

Tomohiro Ohsumi/Bloomberg

After stumbling for two decades, the Japanese stock market is showing signs of regaining its stride.

The country's new government has pressured its central bank to boost inflation and weaken the yen in an effort to jump-start economic growth. The new agenda has been a tonic for Japanese stocks, which have shot up more than 30 per cent since an election was called in November and the now-ruling Liberal Democratic Party began its campaign.

A less muscular yen would make Japanese goods more attractive on global markets and fuel profit gains at the country's export-oriented companies, which make up an unusually large portion of the country's stock market.

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Since the Bank of Japan announced its strict pro-inflation policy last week, the yen has weakened to around ¥91 to the U.S. dollar from close to ¥89 previously.

A Goldman Sachs report released last week suggested that if the yen hits ¥100 to ¥110 against the U.S. dollar, the Topix index, which measures all Tokyo-listed stocks, could rise as high as 1,270 points, a 35-per-cent increase from current levels.

Ed Rogers, chief executive of Rogers Investment Advisors, is confident that can happen. He believes Japan's stock market, which is trading at about a third of its peak hit in 1989, could provide returns of 25 per cent or more in 2013.

"The stars are actually aligned now," Mr. Rogers said in a phone interview from Tokyo.

For nearly two decades, he has closely watched Japanese stocks and says they are now "tremendously undervalued" on metrics such as price to book value.

He believes the market growth in coming months will mean "everyone will need to have [Japan] in their portfolio."

Yoshito Sakakibara, JP Morgan Asset Management's head of investment research in Tokyo, said in an e-mail that even if the yen remains stable, "the corporate earnings picture for the new fiscal year starting in April should be very positive with the correction to the earlier yen strength."

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Recent stock market rallies in Japan have fizzled out after a few months and the current one could end quickly if signs emerge that Japan isn't on track to hit its inflation target, but Mr. Rogers is confident that investors who hold on tight will be rewarded. He says the Nikkei 225 index could jump more than 60 per cent in the coming years. "This is a multiyear process," he said.

Not everyone is so optimistic. When Honda released its quarterly earnings this week, it barely altered its forecast for the yen, calling for it to trade at ¥81 to the U.S. dollar during the coming fiscal year, signalling that the currency weakening might not be nearly as permanent as many hope.

But other companies who reported this week provided more reason for hope.

Nintendo Co. Ltd., for example, more than doubled its profit forecast for the fiscal year ending March 31, 2013 to ¥14-billion ($152.3-million Canadian).

The Bank of Japan said last week that it would try to hit an inflation target of 2 per cent growth "at the earliest possible time," while removing any deadlines from its asset-purchase program, in an aggressive attempt to stoke the country's economic growth.

The new stance counters Japan's history of central bank inaction.

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In a 1999 paper, the current U.S. Fed chairman, Ben Bernanke, then a Princeton professor, wrote that Japanese monetary policy had a case of "self-induced paralysis," and that the Bank of Japan needed to abandon its caution and defensiveness.

Some of the new inflation and stimulus measures won't begin until 2014, but Mr. Rogers said this will let the central bank and new government make sure citizens are willing to buy into the plan, creating the consensus that is customary in Japanese decision making.

Canadian investors looking for a low-cost way to place a diversified bet on Japan's potential boom may want to consider the iShares MSCI Japan ETF, which tracks the MSCI Japan Index of large and mid-cap stocks and charges an expense ratio of 51 basis points.

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