Last week, we outlined a contrarian case for Japan more specifically, for Japan stocks. As countless commentators never tire of repeating, the top-down story for Japan, well…basically sucks, for the reasons just about everyone has heard umpteen times. Last November, however, we suggested Japan did despite the poor top-down outlook have a fighting change at outperforming in 2010, largely because of a weakening in JPY against USD and Euro against the backdrop of recovering global trade.

This view was predicated on a significantly weaker yen, instigated by a) waning risk aversion, b) a significant divergence in US and Japan monetary policy, i.e., the Fed moving to tap the brakes while the BOJ was still trying to find the accelerator. The latest move by the BOJ and the Fedfs shutting down of the last of its liquidity programs were supportive of this view.

But the boost from additional easing measures by the BOJ was only fleeting, and investors were soon back to worrying if Greece will have to ask the IMF for help and China tightening, while bidding up JPY against the Euro. A downgrade of the property sector by Morgan Stanley didnft help either, as it came as the Ministry of Land, Infrastructure, Transport and Tourism was announcing that nationwide property prices as of January 2010 were falling 4.6% YoY for the second year, with commercial prices in selected central Tokyo sites dropping 25%~26%, with idle office space rising in Tokyofs 23 wards, Osaka and Nagoya to 6%, 10% and over 12% respectively.

That said, it appears that JPY/USD is being set up for a significant move out of what has been an increasingly narrow trading range, and the MSCI Japan index has been outperforming the World, EAFA and Emerging market indices for the past three months in clocking a 5.7% gain, while the Japan Value index has returned 6.1% during the same period. While fund flows into Japan stocks so far have been in the larger cap companies, the JASDAQ (smaller cap growth) currently offers the lowest P/E multiple among TSE 1, TSE 2 and JASDAQ, while TSE 2 offers a PBR of 0.68X, or a 32% discount from stated book values.