It's Time for A Turnaround; Japan's corporate balance sheets are in better shape than at any time since the 1970s.

Byline: Henry Blodget (Blodget, a former securities analyst, writes frequently for Slate and other publications. He owns Japan-focused index funds.)

On Nov. 1, a software glitch at the Tokyo Stock Exchange shut down trading for the better part of a day, the worst system failure in the exchange's history and one that could have rattled even the most confident Japan investors. For the past 15 years, after all, Japan's stock market has caused little but misery, and now the exchange itself had collapsed. In a sign of how Japan optimism has soared of late, however, investors merely used the hiatus as a chance to place more buy orders: when trading finally resumed, the Nikkei burst skyward, closing up 2 percent on the day.

The most recent rally has taken the Nikkei over 14,000, its highest level in more than four years. Although this is still only a third of the market's peak in the 1980s' baburu jidai (bubble era), it represents a near doubling from the postbubble low of mid-2003. This rise--along with the reforms supported by telegenic Prime Minister Junichiro Koizumi and some encouraging financial trends--has convinced many that Japan's economic woes are finally at an end.

A recent Merrill Lynch survey of global fund managers, for example, revealed enormous optimism about the country: the majority of those surveyed are now overweight Japanese stocks (and underweight American ones). American stockbrokers these days murmur "EWJ," the ticker symbol for the iShares Japan exchange-traded fund, in the same sotto voce tone normally reserved for biotech tips. Of course, widespread optimism is often a sign of trouble (Everyone loves it? No one left to buy!), so it's worth asking whether the turn is sustainable or just another Japan head fake. The unfortunate answer, as with all things economic, is that we won't know for sure until after the fact. But that needn't stop us from asking.

A recent Economist survey by editor Bill Emmott, who called the bubble top in 1989 in a book called "The Sun Also Sets," presents the positive case, arguing that many minor recent improvements in Japan's economic and legal systems collectively amount to major change: fewer bad loans plaguing the banking system, increased labor flexibility, a pickup in full-time employment (which could lead to increasing wages and a boost in consumer spending), a surge in takeover bids, industry consolidation and increasing efficiency. Jesper Koll, Merrill Lynch's Japan economist, adds that corporate balance sheets are in better shape than at any time since the 1970s, ...