JAPAN'S economy - once the powerhouse of the Pacific - is showing signs of a recovery after a troubled few years. This improvement is reflected in the state of unit trusts that are investing in Japan. All Japanese funds showed negative results during the previous two or three years, but they have now performed better during the past six months. ''Not so long ago, people were saying they didn't want to get into Japan for another six to nine months,'' said Nigel Down, Thornton's investment advisory manager. ''Now, the time scale has dropped to one or two months.'' He said unit trusts had performed much better over the last three to four months. Although the election would have some effect in the short-term, he said the economy was improving. ''Maybe the market has already turned, but I expect corporate earnings will bottom in the third quarter of this year and, after three years of a bear market, we can look forward to a bull.'' In the six months up to June 21, Thornton Japan showed a return on investment of 33.9 per cent. This is in line with the market trends. At the end of May, a year-on-year investment return table showed Japanese equity funds with an annual return of 36 per cent, and a return over the previous three months of 39.2 per cent. Figures for funds investing in smaller Japanese companies were 30.7 per cent and 44.9 per cent respectively, while Japanese warrants funds showed a 122.8 per cent growth over three months, compared with a meagre yearly return of 14 per cent. Among the top 15 fund performers were Jardine Fleming's Japanese Over-the-counter Stocks Fund, at number three, and a fidelity fund investing in Japanese smaller companies. Another example of interest in Japanese funds is the launch of a Japan Fund by Barclays this month. Despite the poor performance of the country's economy, Japan is still a leading economic power in Asia, and has the ability to bounce back. The economy's growth is higher than average for a mature country. Its inflation is steady, and interest rates of 3.5 per cent may come down by a further half a percentage point. ''There is a definite upward trend,'' said Roger Pyrke, the regional director of Barclays International Fund Managers. ''The economy is better positioned and has more strength than, for example, the United States or many European countries. ''I am fairly confident we will see between three and four per cent growth, and within the next month the [Nikkei] Index will hit 25,000.'' Mr Pyrke said the fund was launched this month because there was not much enthusiasm for Japanese equities in January, and because he wanted to see ''a bit of recovery'' in the market before the launch. ''As it happens, we were slightly late, although I'm glad we didn't launch it this week when the Index fell. ''People are worried about the political short term, but Japan's economic policy in the long term remains the same.'' Jardine Fleming's Pacific Smaller Companies Trust, which includes investment in Japan, also attracted record sums on its launch day. The fund has attracted US$140 million. Forty-five per cent is now invested, which includes four per cent in Japan. ''We are taking a prudent approach,'' said Richard Mosley, of Jardine Fleming. ''The key word at present is uncertainty and, with a lack of political guidelines, some investors have taken this as a signal to take their profits. ''I would like to think that the market had bottomed. Mr Mosley said that part of the recent strength had been in anticipation of a cut in interest rates, but because the yen had come off sharply, there was now less need for the cut.