Buy Japan - the world’s cheapest developed market

Forget about Murakami, Murasaki and Kawabata, this year's Japanese publishing sensation isn't an author. In fact, he's not even Japanese.

He's German, sports a big beard and is pushing up daisies in a north London cemetery. That's right. Coming to a bookstore near Mr and Mrs Smithanaki is Karl Marx's Das Kapital. In Manga. And it has bookstore owners rubbing their hands with glee.

That's hardly surprising. Misery books are big sellers in a country now facing its third recession in less than 20 years. House prices have been falling for over a decade and the stock market, at its lowest 34 years, has wiped out retirees' pensions from Fukuoka to Akita. It pays to be gloomy in Japan.

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And it's only going to get worse, says Masamichi Adachi, senior economist at JP Morgan. "Japan may be entering its deepest recession in a decade as the global financial crisis cools demand overseas."

So are we going to change our minds about being bullish on Japan? No, is the short answer. Sure, it's entered recession. But it's likely to come out of it much more quickly and in better shape than the Western, debt-dependent world. As Capital Economics says, Japan is likely to be the best performing of the G7 economies in 2009 and probably 2010, thanks to low levels of personal and corporate debt, and unemployment levels that the rest of the OECD could only dream of.

True, the global recession will hurt its exporters hard. Exports fell 7.7% in October from a year earlier, the biggest drop since 2001, with automakers and electronics manufacturers already planning to slash jobs. Isuzu said last week it would cut 1,400 contract workers; Toyota will cut 3,000 employees by March; and Honda, Sony and Nissan are not far behind with glum news.

But arguably, the bad news is priced in. On a p/e of 11, Japanese stocks are at their cheapest in more than a quarter of a century, compared to the average of 80 during the 1990s. The last time this happened, says Steve Sjuggerud on the Daily Wealth, was in 1974, after which the Topix rose by 165% in four years.

David Mitchinson, manager of JP Morgan's Japan Fund, tells Citywire: "you can find hundreds of stocks trading below net cash. We are seeing valuations that are at the lowest they've historically ever been." By some estimates, around 60% of Japanese firms are now valued at a lower price than they would fetch if they were shut down and all their assets sold off, with over a quarter trading below half their book value, according to Bloomberg.

You can gain cheap exposure to the broad Japanese market through the London-listed iShares MSCI Japan fund (LSE:IJPN), which tracks the MSCI Japan index. However, given that exporters are likely to be among the worst hit, it might be better to have a look at a fund with more exposure to domestic stocks. The Perpetual Japanese Investment Trust (LSE:PJI) trades at a 2.8% discount, with major exposure to utilities, pharma, retail and real estate. Potentially better value is the Baillie Gifford Japan trust (LSE:BGFD), which invests in medium to smaller Japanese stocks, and trades at a 14% discount.