It has suddenly become chic to be bullish on Japan. The cause and the effect is that the Japanese stock market is racing upwards, but in fact the phenomenon is much wider. The Japanese economy generally is improving across the board, and Japanese real estate is, for the first time in fifteen years, a serious proposition for serious investors. There were a few people, even outside of Japan, who realized two years ago that the Japanese economy and stock market had turned the corner. At the time, they were a small minority in a sea of entrenched pessimism. They bought the Tokyo stock exchange when the Nikkei index was just beginning to rebound from its 20-year low of 7,700. By this time last year, the index had risen through 10,000 and had briefly climbed above 11,000. It then spent the better part of a year stuck in a trading range, between roughly 10,500 and 11,500. However, over the last two months it has taken off. The background has been a mixture of positive political and economic news on the domestic front, which the much less happy tidings from overseas, most notably those regarding oil prices, have had no impact on. The result has been that the pace of the rise in the stock market has become steadily quicker and by Thursday of this week the Nikkei index was above 13,500. No doubt this pace is unsustainable and quite probably there will be a reaction in the near future. But this is one of those cases where daily movements are not very important because what matters is the longer-term trend. The length and depth of the slump in Japan are so exceptionally severe that the scope for recovery is vast. The basic historical data about the Tokyo stock exchange tells the story: it rose from 7,500 to 39,000 between 1983 and 1990 (during the bubble era) and then fell all the way back by 2003(after the bubble burst). Now it is at 13,500, which is a long way from 7,700, but very much further from 39,000. If Japanese company profits continue to rise and if domestic and foreign investors continue to put money into the market, there is ample scope for very significant further rises. Some technical analysts see the 19,000 level as the next important level to be reached. Given this potential, the current bon mot is to increase the percentage of portfolios invested in Japan. But this must perforce come at the expense of other markets. The question facing investors of all shapes and sizes is: which? On the basis of the activity in the markets these last two months (and for the last year or more, for that matter), it seems that the answer is that the US market is the one being downsized, to provide resources for Japan. The European markets are all rising, some more than others, and no other markets are big enough to be relevant in this context. At the same time, on the macro-economic front, it is Japan that is recovering and the US that is weakening. People are increasingly confident in and about Japan; they are increasingly worried in and about America. This leads to the fascinating possibility that we may be on the verge of a tipping-point, when the leadership role in the global economy moves from the US which has almost single-handedly generated all the growth in the developed world for the last 8-10 years to Japan, which has been a drag on the global economy throughout that period and longer. (China is important, of course, but it is still much smaller than the big three economies of the US, the EU and Japan.) Within the overall Japanese market, there is significant diversity as you would expect. But it is worth considering that the part of the Japanese economy that has been hardest hit has been the financial sector: many banks and insurance companies have either formally gone bust, been bailed out and resold, or have effectively gone bankrupt, and their share prices have reflected this. As a result, the weight of the financial sector within the overall market has shrunk to a fraction of its level at the height of the boom. Meanwhile, the weight of the financial sector in the US market has swollen over the last 15-20 years and has reached unprecedented levels especially if you remember that much of GE is financial services. Anyone who believes in market cycles (ie that no trend goes on forever) must be tempted to swap New York for Tokyo. If so, swapping the bloated and overpriced American financial sector for the beaten-down Japanese one should make even more sense.