Japan appeals to RBC strategist's contrarian antennae

Although the Topix index was down 13 per cent in sterling terms, Peter Lucas said the market falls had appealed to his "contrarian antennae".

"Something of a gulf has opened up between perception and reality in Japan," he said.

Although Japan is often assumed to have a poor long-term outlook due to a vast demographic and fiscal burden and massive long-term deflation, Mr Lucas said these factors were less critical in Japan than they might initially appear.

He argued Japan could sell "significant public assets" to reduce its net debt burden, which is near to 100 per cent of GDP.

Mr Lucas was also optimistic on the demographic picture in the country over the next 10 years.

Investors have usually maintained Japan will suffer economically from rampant ageing and an ever-diminishing number of earners as a proportion of the population.

But Mr Lucas said the Middle-Young (MY) ratio - the number of earners and savers in their 40s divided by the borrowers and spenders in their 20s - was due to increase in Japan in the next 10 years, historically a bullish signal for the stock market.

"The peak in the MY ratio corresponded with the peak in Japan's stock market in 1989-90," he said. "Similarly, America's MY ratio peaked with Wall Street in 2000 having risen strongly through the 1980s and 1990s.

"Looking to the next 10 years, while the MY ratio is projected to remain flat or fall in much of Europe and the US, it is expected to rise sharply in Japan."

A more recent detractor in Japan has been the strength of the yen, which has made Japanese exports, the lifeblood of its economy, more expensive.

Mr Lucas said the strength of the yen could force Japanese companies to strengthen their balance sheets and restructure their costs.

However, Mr Lucas pointed out Germany went through an extended "tight spot" before it was able to restructure its economy after the deutsche mark strengthened earlier this decade.

Germany also experienced demographic difficulties, with a large proportion of the adult population out of work and depopulation in a number of areas.

Like Japan, investors looked to political reform in Germany to improve the economic outlook. But with a complex coalition in place in the country, some doubt whether Japan will achieve the necessary consensus.