Japan looks bullish as Prime Minister Shinzo Abe rolls out reforms to stimulate the country after a decade-long economic stagnation. In an article on The Wall Street Journal “Looking Beyond Yen in Japan” Yumi Otagaki suggest that now is the prime time for foreign investors to look beyond the familiar selection of exporting giants (Toyota, Sony, etc.), and focus instead on small/midsize domestic companies. Though this assessment has some merit, the article risks being too optimistic. First and foremost, it’s yet unknown how effective the reform will really be in the long term. In particular, there are questions about the true drive behind Japan’s recent market recovery. Is it due organic industry growth, or is it the effect of a national hype following Abe’s bold promises?

A stock indicator board in Tokyo (image taken from The Wall Street Journal)

Never the less, my analysis shows that the short term boom will continue, during which small businesses will experience growth as the domestic market revitalizes. But at the same time investors must be extra careful about these small companies’ realistic worth so as not to be caught in a bubble as share prices spike above their true value. Moreover, only newly emerging industries will continue to benefit from sustainable growth after the immediate effect of the new reform wears off. Some hedge funds have smartly chosen to invest in Japan’s medical services given the country’s aging population. I think the organic foods industry might also also a good bet. In a wealthy and increasingly health conscious nation, what will the consumers eat?