Changing Japan grabs investor attention

TOKYO (Reuters) - With the rest of the world smarting from the global credit crisis and singed by rising inflation, Japan, rarely a top pick of global fund managers, is starting to grab more investor attention.

Increasingly a target for activist funds and M&A, Japan is also home to many cash-rich firms and investors -- themselves unburdened by subprime damage -- that are now hunting for their own opportunities abroad.

After a sharp downturn in 2007 and the first quarter of 2008, Japanese stocks have managed a solid rebound in the April-June quarter, helped by expectations that rising prices will offer some respite from deflation, which has squeezed demand and sapped profits for years.

"Japan is increasingly seen by investors as a relatively good market to be in a time of rising inflation and inflationary expectations," said Jonathan Allum, a London-based Japan strategist at KBC Securities.

Japan's core consumer price index, which excludes volatile fresh food prices, rose 1.5 percent in May from a year earlier, marking the biggest annual rise in a decade.

The benchmark Nikkei .N225 rose nearly 8 percent in the April-June quarter, compared with the Dow Jones industrial index .DJI, which looks set for a 7.5 percent fall, and the FTSE 100, which appears ready for a 2.5 percent fall.

JAPAN STEPS IN

Losses from the U.S. subprime mortgage market and the global credit crisis have waylaid Citigroup (C.N), UBS (UBSN.VX) and other Western financial firms, but Japanese banks have avoided much of the damage and have therefore been able to step in with funding.

After a decade of faltering under bad debt, Japanese banks have cleaned up their balance sheets and rebuilt their businesses. Faced with a shrinking market at home, Tokyo's large lenders are once again looking abroad.

Sumitomo Mitsui Financial Group Inc (8316.T), Japan's third-largest bank, said last week it would spend about $1 billion to take a 2 percent stake in subprime-hit British lender Barclays (BARC.L).

Even the country's biggest subprime casualty, Mizuho Financial Group (8411.T), has injected $1.2 billion into U.S. rival Merrill Lynch MER.N.

Mizuho, Japan's second-largest lender, had enough liquidity to make the investment, even as its own subprime losses climbed to 645 billion yen in the year to March 2008.

And banks aren't the only Japanese investors looking abroad to capitalize on the subprime.

Despite their reputation for caution, many Japanese investors have seen the tumble in foreign stocks and currencies as an opportunity to buy.

"Japanese retail investors' appetite for foreign assets has been recovering gradually, and institutional investors such as life insurers are becoming more positive about risk taking," said Masafumi Yamamoto, head of foreign exchange strategy for Japan at the Royal Bank of Scotland.

OPENING UP?

Long accused of a hidebound business culture and indifference to shareholder rights, Japan is now showing tentative signs of change.

U.S. fund Steel Partners last month helped oust the president and most of the board of wig maker Aderans Holdings Co (8170.T), the first time management of a Japanese firm had been ejected under pressure from an activist fund. ID:nT203406

On Monday, Aderans named a new president and appointed a board member from Steel Partners.

Some other overseas funds have not yet been so successful. Activist funds lost battles against J-Power (9513.T) and NipponKoa Insurance Co (8754.T) last week, as shareholders knocked back moves to oust management and win higher dividends. ID:nT928

Regulators are also looking to change. Japan has recently relaxed its tax code so foreign asset managers and hedge funds can avoid dual taxation, as part of a push to revive itself as a global finance centre and compete with more flexible hubs such as Singapore and Hong Kong.

(Additional reporting by Chikako Mogi, Editing by Sophie Hardach)