There's a Rising Sun for Japanese Stocks

Take Serai manages the Gabelli Japanese Value Partners Fund and says the domestic pickup has helped midsized and smaller companies. The hedge fund manager also says the Bank of Japan's most recent Tankan survey also showed increased confidence among manufacturers.

"It's probably more sustainable than previous cycles," he says.

But belief in the Japan story doesn't mean mutual fund investors can just throw darts and find top performers. Japan funds are on the pricey side, with an average expense ratio of 2.1%, and Japanese stocks are already part of many international equity fund portfolios.

"Up until last year, they were one of the worst places to have your money," says Gregg Wolper, a senior analyst at Morningstar.

Though that's no longer the case, analysts and financial planners say a diversified approach is always best for small investors.

"Investors need to see how much exposure they already have in their core foreign holdings," says Bill Rocco, another senior analyst at Morningstar. "You need to decide whether you want some of the same Japan exposure, or different Japan exposure. Presumably for large-cap stocks, that will be Nissan (NSANY Quote), Sony (SNE Quote), Honda (HMC Quote). Do you want to double up on that or do you want to broaden your holdings with some Japan small-caps?"

Michael Kitces, director of financial planning at the Pinnacle Advisory Group in Columbia, Md., says that a weak dollar means a boost for investors in most international funds, but that betting on a single market always concentrates risk, even if the Japanese economy keeps recovering.

"I think this is a real start for them for the first time in 15 years, but there are still enough issues that being a little more wary -- and a little more pan-Asian -- is safer, especially for the smaller investor."