Promises from politicians are common and easily shrugged off, but investment pitches from the leader of the world's second-largest economy stand out, especially when they're on international cable television.

Japanese Prime Minister Junichiro Koizumi has gone nationwide in the U.S. with a campaign that asks a question that mutual fund investors may find has a satisfying answer.

"We have all you need for success," he says at the end of the new commercial. "Why don't you join us? Invest in Japan."

Particularly if you're looking for equity mutual funds that are outperforming a flattening U.S. market.

After 13 years of stumbling economic growth, the current recovery has helped drive a rally in the major Japanese stock indices that has outpaced that of the benchmark S&P 500 by a considerable margin, prompting some analysts to say this recovery is the real thing. Driven by increased domestic consumption, confidence in the yen and an Asian economy powered by roaring Chinese growth, the current Japanese economic recovery is better balanced than in past export-led bear market rallies.

Recent returns by Japan and Asia-Pacific mutual funds -- which are often heavy Japanese shares -- show encouraging results. According to fund tracker Lipper, the average Japan fund had a total year-to-date return of 13.4% and an average 12-month (since March 31, 2003) return of 70.49%. It's been a long climb back, though, with the average three-year return (since March 30, 2001) limping along at 1.42%.

In comparison, the S&P 500 sagged after a fast start this year, posting a total return of 1.69% for the first three months of 2004. The index is up 35.12% for the past 12 months. Other major benchmark indices, such as Germany's Xetra DAX, which is down 2.4% for the year, don't measure up to the Japanese indices.

Byron Wien, chief strategist at Morgan Stanley, is among the leading proponents of a Japanese recovery, predicting in January that the economy would pick up steam and that the key Nikkei index would rise.

So far he's been right, and other investors are starting to heed the call.

"We expect foreign investors to be the central player in Japan's stock market," says a Morgan Stanley research report released last week. "We believe they will buy Japanese stocks; stocks are more attractive than bonds during a global economic recovery, and Japanese companies are likely to post higher earnings growth, aided by reform, than their U.S. counterparts, which are already in good shape."

The numbers lend support to the Japan bulls.

For the year to date, the total return for the Nikkei 225 index is 9.43%; for the past 12 months, it is 46.28%. The S&P Topix Core 30, which includes large-cap, well-known stocks with U.S. listings, such as Toyota ( TM), Hitachi ( HIT) and Canon ( CAJ), is up 7.3% for the year to date and 39.2% for the 12 months since March 2003. The Topix Large 70, which includes many companies that benefit from increased domestic consumption, such as Mizuho Financial Group and Softbank, rose 13% for the first three months of this year and 49.9% in the past 12 months.

Analysts say this shows domestic demand is growing. That key component of recovery was absent from the market recoveries of the past decade, which didn't last.

"Since the early '90s, they've touched bottom, they've gone back up and gone sideways, and that's happened anywhere from eight to 10 times," says Lipper senior research analyst Andrew Clark. "They're at a turning point here. You have to remember that domestic demand is two-thirds of Japanese GDP, and that never appeared in the last economic recovery, short-lived as it was."

Returns from top-performing mutual funds give weight to the optimistic outlook.

The $3.2 billion Matthews Japan Fund (MJFOX) produced a total cumulative return of 103% over the past 12 months, and the $1 billion Fidelity Japan Smaller Companies Fund (FJSCX) returned 97% over the same period, according to Lipper.

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), Sony ( SNE), Honda ( HMC). 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."

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