The Japan Syndrome; Global Investor Peter Tasker.

Byline: Peter Tasker; Tasker is a founding partner of Arcus Investment, an investment company specializing in Japanese securities.

Is Japan slipping back into global irrelevance? Frustrated investors may well be asking themselves that question after the Tokyo market's unimpressive performance of the past 18 months. In a period when most other Asian markets have blown the doors off, with returns ranging from 20 percent for military-ruled Thailand to an eye-popping 270 percent for the Shanghai market, the Nikkei index has risen a tame 9 percent. Since the yen is one of the few currencies to have fallen against the U.S. dollar--the other notable example being Zimbabwe's currency--returns to foreign investors have been flat at best.

It gets worse. Over the past several weeks, a series of court rulings and shareholder votes have gone against foreign activist investors who had been pressing managements to improve. And Japan certainly needs activists. Currently, less than one fifth of profits are paid out to shareholders. One recent request for an electric power utility to hike its dividend for the first time this century was rejected on the ground that a "stable dividend" is preferable to a growing dividend.

Things weren't supposed to turn out this way. Two years ago, Japan was the darling of global investors. Prime Minister Junichiro Koizumi had just won a landslide election, the Nikkei soared 40 percent in just five months, and foreigners, excited by Koizumi's promises of liberalizing Japan's vast pool of post-office savings, poured capital into Japanese shares.

But Japan is not China or India. It is a mature economy with a large, liquid stock market, still the second largest in the world. No amount of reform was ever going to be sufficient to sustain the kind of steep rise it enjoyed in late 2005.

That said, things today aren't as bad as they seem. For starters, Japanese corporate profitability has increased, especially for world-beating auto and machinery companies riding a yen that is at its most competitive level since the early 1980s. Japan's private sector generates a vast amount of savings, far more than enough to fund booming capital investment and the budget deficit, with plenty left over to pump overseas.

Meanwhile, there's plenty of value to be released at the corporate level. Shareholder activists have been disappointed by recent events, but the story is by no means over. The requests for higher dividends may have been voted ...