Japan has taken a long time to shake off its status as East Asia's faltering economic powerhouse but after a series of false dawns the signs of economic recovery are becoming ever clearer. That is good news for investors. 'This may be the beginning of a decade's appreciation of the Tokyo stock market,' Nomura Securities chief equity strategist Chisato Haganuma told South China Morning Post last week. The signs have been around for some time. Tokyo's Nikkei 225 Index now hovers near 16,260 points compared with 11,430 points only 12 months ago. But, according to Mr Haganuma, the long-term appeal of Japanese equities hinges on three factors: macro-economic growth fuelled by capital investment and private consumption; improved corporate earnings driven by growth in other Asian economies; and the reallocation of capital by local investors away from traditional property plays. Figures to support the first have come in a rush in recent months. The Organisation for Economic Co-Operation and Development estimated growth of 2.4 per cent for Japan last year and is forecasting solid growth of 2 per cent annually to 2008 while Japan's domestic corporate goods prices have risen for 23 consecutive months with the largest monthly rise in 15 years coming last month. The industrial output index posted a record high in December while consumer spending has grown for four consecutive months. The improvement in corporate earnings, especially in Japan's depressed consumer electronics sector, has come as more of a surprise. Both Sony and Hitachi outperformed analysts' expectations in their most recent quarterly earnings; the latter recording an 18 per cent rise in net income to a quarterly record of 169 billion yen ($11.12 billion) in the three months to December. 'For several years, these firms were unable to increase their sales in overseas markets which is why their results were so horrible,' Mr Haganuma said. 'But we may have a turnaround, mainly because the companies are focusing more on their core business.' Sharp and Matsushita - two companies criticised for over-diversification in the past - are good examples, with the former now focusing heavily on LCD televisions and monitors and the latter investing heavily in plasma. Mr Haganuma said investors should focus on larger firms able to capitalise through production in and exports to other fast-growing economies. 'The automobile sector continues to increase its overseas sales ratio, even though it is working from an already high base,' he said. 'For example, by focusing on environment-related technology and cost competitiveness, Toyota has been able to create customers even in developing markets.' There was also potential value beyond traditional Japanese stalwarts, he said. Machinery company Komatsu, for example, had found a burgeoning market opportunity in the Gulf states, as had advanced materials manufacturer Toray Industries in China. But the final component in Mr Haganuma's three-pronged confidence in equities is the greater investments in the stock market played by local retail investors. 'Especially in the 1970s, Japanese people put their money into property but following the collapse of the property bubble and especially since 2003, the equity investment trusts in Japan have started to increase their assets significantly,' Mr Haganuma said. 'What has helped this trend is that Japanese firms are now more in tune with the concept of returning profits to the shareholders.' This trend of reallocating investment capital is also visible in Prime Minister Junichiro Koizumi's pet project to privatise Japan's postal-savings system to 'make a shift from deposits to investments'. The issue is the extent to which retail investors' participation in the stock market is sustainable, especially in the wake of the Livedoor scandal, in which the internet company's founder, Takafumi Horie, was arrested on suspicion of securities law violations. 'The surprising thing is that in the week of the scandal, retail investors turned out to be net buyers by more than 500 billion yen,' Mr Haganuma said.