TOKYO -- For the infamous army of equity salesmen at

Nomura Securities

, it probably hasn't been the easiest of years.

After getting notice that the firm was launching its biggest mutual fund project, daftly titled "Big Project-N," the 5700-plus sales force picked up the phones and advised clients to shed whatever shares they held individually or in other Nomura funds to reinvest in what is now called the

Nomura Japan Equity Strategy Fund

. The fund, which invests about 1.1 trillion yen ($10.2 billion) in both gross and value stocks, is now the largest mutual fund in Japan. Investors have rewarded Nomura by boosting shares over 50% in just five months.

This would all be pretty swell for the Nomura salesmen if they weren't so busy explaining to clients why the

Nikkei 225

keeps hitting fresh six-month lows: The index is now 15.9% off its April high. The global tech blowout and the reshuffling of the Nikkei certainly didn't help, and now recent data from the

Tokyo Stock Exchange

show foreign investors, who poured more than 9 trillion yen into Japanese equities in 1999, sold 846 billion yen of securities in April alone.

Why did foreign investors, largely thought to help the Nikkei 225 index rally 37% last year, turn net sellers of Japanese securities last month for the first time since fall 1998? Was Japan's 1999 stock market rally a one-shot deal? Not so, say fund managers who run Japanese equity funds. Many remain quite bullish and even say now is the best time to buy shares, before a longer-term, sustainable rally begins later this year.

"There's a great chance that first-quarter gross domestic product will turn positive, and I think all of the structural changes Japan has been making will turn into real growth sometime in the latter half of this year," says Kunihiko Sugio, manager of the

(MSJEX)

Morgan Stanley Dean Witter Institutional Japan Fund.

Sugio, whose fund is up 40.2% over a year, is not worried about the recent spate of foreign sellers, whom he characterizes as momentum players. Many European short-term investors caught onto Japan's tech rally a little late in the game, he says. A recent survey by

Merrill Lynch

backs this up, showing that the number of European fund managers bullish on Japan dropped sharply since the Nikkei's peak last month. Moreover, with the euro weak, it's prime time for many European players to take profits, exchange yen for euros, and buy shares at home, Sugio explains.

Another wet blanket on the market was the recent reshuffling of the Nikkei 225, which raised the technology profile of the index. As a result, Japan and the ailing

Nasdaq Composite Index

have become more closely linked in many investors' minds -- something that in truth may not make sense.

"Historically, there is little correlation between the performance of U.S. and Japanese stocks," says Brenda Reed, fund manager of Fidelity Investments'

(FJPNX) - Get Report

Japan Fund, which is up 102.5% over the past year. "Japan has struggled throughout the 1990s, while we all know the U.S. hasn't."

Reed says it's important to understand the two countries are in different economic cycles. Japan "looks to be on the verge of a pickup," and if management of Japanese companies continues to focus on earnings growth and shareholder value, the short-term, knock-off effect from a downturn in U.S. stocks will be erased, she adds.

Economic fundamentals haven't changed all that drastically in Japan since 1999. Personal consumption, which makes up about 60% of gross domestic product, continues to fall, but corporate investment, especially in information technology, is up. Gross domestic product was down for the past two quarters, sending Japan into a technical recession, but many companies -- like chipmakers -- are starting to show strong profits despite the weak domestic economy.

This runs contrary to a recent column in the

New York Times

by Paul Krugman, professor at

Princeton University

, who said that the Nikkei's recent plunge was a sure sign that that the "economic strategy of Japan's government is falling apart."

He is half right in the sense that it's safe to say everyone wants the Japanese government to move faster than it has in implementing sound economic policy. There are some major U.S. brokers, including

Merrill Lynch

, that say they aren't buying any more Japanese shares until they see proof of an economic rebound via data. However, that doesn't mean these long-term investors are going to sell all that they bought last year. And to say Japan's recent moves -- such as bank revitalization programs and accounting overhauls -- are not sound steps in building a foundation for a more viable economy is ridiculous.

A more reasonable conclusion to draw from the Nikkei's decline is that the days of investors juicing up their portfolios by incorporating a few highflying Japanese shares like

Softbank

, which rose a whopping 1338% last year, are over. It does not mean that some of the painful changes Japan Inc. took over the past three years won't bear fruit.

Says Sugio: "Unlike 1999, the rally in Japanese shares for the next three years won't just be in one narrow sector like IT. It'll be everywhere as reforms, restructuring and changes keep occurring. The rally is going to encompass everything."