Kazuo Ueda is edging closer to being appointed the new governor of the Bank of Japan. He has the backing of Japan’s prime minister and appeared before parliamentary hearings last month as part of the confirmation process.

A former economics professor and veteran board member of the bank, Ueda has made it clear that he would not make changes quickly. This should not surprise anyone. ‘Long-term’ in Japan means centuries, not years. Change takes time. But change is inevitable, and Ueda has not ruled it out. That could help make Japanese equities even more attractive than they are already.

Current incumbent Haruhiko Kuroda has been governor of the Bank of Japan since 2013. His policy focus has been on improving Japan’s growth prospects and eliminating the persistent deflation that has long hampered the country. Falling prices might sound appealing here, but they choke economies. They encourage people to delay spending, companies to stall investment and banks to stop lending.

Kuroda’s core strategy, rigidly enforced, has been to adopt ultra-low interest rates. The markets believe this is now unsustainable. If Ueda’s nomination is ratified by Parliament, many experts expect Japan’s interest rate strategy to normalise, turning positive from its current level of minus 0.1%.

Inflation long-awaited

Inflation has finally washed up on the shores of Japan and could not be more welcome. In January, it rose to 4.3% from 4% the previous month. The rise may not be sustained, but this is enough to encourage Japanese companies to start lifting wages, something they have not had to think about for some time.

Inflation and interest rate rises could have a dramatic effect on the yen. For a long time, it has been a profitable play for currency traders to borrow in yen and then use the cash to buy high-yielding currencies elsewhere in the world. And not just currency traders. Japanese financial institutions are estimated to have $1tn in foreign bond holdings. These sorts of flows can flip very quickly and dramatically.

If the yen rises, Japan’s institutions may have to start repatriating the money to mitigate currency risk. This reverse flow could see the dollar dragged down – potentially bad news for the dollar.

It seldom pays to place too much confidence in predicting currency movements, but global equity managers cannot ignore them. Currencies are just one more reason why investors need global diversification and balance. I admit that for the past 15 years this has not really earned its keep as a strategy. To succeed you just had to hold a portfolio of US tech stocks. But the past couple of years has seen that change.

As central banks move to quantitative tightening, the shock absorbers are being removed from the system. The tectonic plates of currency markets are shifting. Risks abound. Diversification and balance make increasing sense.

Japan v US

I know I am getting old, but while I still retain a memory, age has its advantages! When I began my career in the mid-1980s, Japan made up more than 40% of the MSCI All Countries World Index. Today it is 6%. Back then the US was just 33% – almost half what it is today. Does that make sense to you?

We are overweight Japan – 12% of the portfolio. Our exposure to the US is still healthy, but at 45% it is lower than it has been for many years. We have an 18% exposure to Europe now, but that is a story for another day.

Calling a revival in Japanese equity markets is a mug’s game. It elicits snorts of derision from people who have heard it so many times before. But if you are worried about whether the dollar can retain its strength and question the prudence of global market indices that allocate over 60% to the US, I think Japan is worth a look.

You get a lot of value for your money there. It is full of companies loaded with cash, many selling world-leading products. We like the Japanese banks. If inflation overshoots, one might expect them to do well. As elsewhere, we believe rising interest rates will be good for banks’ profit margins. And the Japanese banks offer better value than many. To illustrate that, look at Mitsubishi UFJ bank. You can buy its shares at a 33% discount to book value. JPMorgan in the US trades at a 40% premium to book value. Yes, it is more profitable, but this could change.

Meanwhile, Japan is reopening after Covid. The population are still wearing masks and hesitant about going out, but as that evolves – and when Japan finally allows Chinese tourists to return – expect an economic bounce. Japanese stocks we hold include the banks, Mitsubishi UFJ and Sumitomo Mitsui Financial, lens manufacturer Hoya, automation business Keyence and electronics manufacturer Panasonic.

Despite Japan’s reputation for being parsimonious towards shareholders, lots of companies there today kick out a respectable dividend.

You may not believe Japan is resurgent. But if you have very little exposure to this major market now may be a good time to at least review the position.

Simon Edelsten is co-manager of the Mid Wynd International (MWY ) investment trust and the Artemis Global Select  fund.

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances.