Changing Japan grabs investor attention

By David Dolan and Nathan Layne

TOKYO (Reuters) - With the rest of the world smarting from the global credit crisis and singed by rising inflation, Japan, rarely a top pick of global fund managers, is starting to grab more investor attention.

Increasingly a target for activist funds and M&A, Japan is also home to many cash-rich firms and investors -- themselves unburdened by subprime damage -- that are now hunting for their own opportunities abroad.

After a sharp downturn in 2007 and the first quarter of 2008, Japanese stocks have managed a solid rebound in the April-June quarter, helped by expectations that rising prices will offer some respite from deflation, which has squeezed demand and sapped profits for years.

"Japan is increasingly seen by investors as a relatively good market to be in a time of rising inflation and inflationary expectations," said Jonathan Allum, a London-based Japan strategist at KBC Securities.

Japan's core consumer price index, which excludes volatile fresh food prices, rose 1.5 percent in May from a year earlier, marking the biggest annual rise in a decade.

The benchmark Nikkei .N225 rose nearly 8 percent in the April-June quarter, compared with the Dow Jones industrial index .DJI, which looks set for a 7.5 percent fall, and the FTSE 100, which appears ready for a 2.5 percent fall.

JAPAN STEPS IN

Losses from the U.S. subprime mortgage market and the global credit crisis have waylaid Citigroup (C.N: Quote, Profile, Research, Stock Buzz), UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) and other Western financial firms, but Japanese banks have avoided much of the damage and have therefore been able to step in with funding.  Continued...