After 33 years of false dawns, could it be that Japan can finally take the performance reins? While the S&P 500 has been chopping sideways, Japanese stocks continue to run. Sure, the S&P’s confused action this spring brings no celebration, but it’s not like things have been ugly. To wit, the U.S. broad market benchmark has returned 17.3% since putting in a bottom on October 12. But Japanese stocks are up even more; MSCI Japan is up 20.9%, and its currency-hedged counterpart is 22.7% higher since then.

A setup for Japan longs: a backdoor way to play China for those who are putting a question mark on the country amid the new Cold War. Remember when the tape was weak for Chinese equities, and Beijing made it weaker by smacking around its for-profit education industry a couple years back? It was a university admissions boondoggle there, where it was so competitive that some households spent more on tutors than on housing. The Chinese Communist Party (CCP) didn’t like that, so it piled onto those companies. Investors scurried. But that saga was small potatoes compared to the COVID-19-era push by the state to squash youth video game addiction. In that maneuver, giants like Tencent were compelled to put governors into the software to limit gaming to a few hours per day. Less screen time, less revenue. The bears loved it.

Enter Japan. A G7 economy governed by respect for contract law, the country is being treated as a proxy play for China’s economy. Due to a few thousand years of fraught relations between the two Asian neighbors, Japan is tied at the hip with the U.S. when it comes to this cold conflict.

After the Russia-Ukraine war started, we and everyone else in the fund management industry marked Russian assets to zero. Though that kind of possibility is remote in the forecast for Chinese securities, how much Sino-U.S. relations may deteriorate is unknown. Parking capital in Japan is viewed as a way to stay engaged in East Asian equities while under-weighting this risk.

The other part of the Japan thesis, one that is truly fresh, is the yen’s plunge. Just two years ago, a dollar fetched “only” ¥103; now it’s up to ¥140. Japan is like Germany; the business model is exports, exports, exports. Because the Chinese yuan is quasi-pegged and thus unable to move against the dollar as boldly as the yen can, its weakness relative to the greenback paled in comparison to what happened in Japan. It means that Japanese corporations are more competitive versus American rivals but also against Chinese rivals.

Also, there is TINA, the long-lived acronym that stands for “there is no alternative” to owning things like stocks and other risk assets when $18 trillion in global bonds had negative yields. In a TINA world, it was easier to stomach a sub-2% S&P 500 dividend yield when money market funds were paying nothing. At around 5% USD short-term rates, the calculus got upended.

Unlike the TINA situation in USD, GBP, EUR and other currencies, TINA never went away in Japan. With a stock market at 14.6 times forward price-to-earnings, or a 6.84% earnings yield, the spread over 10-Year Japanese government bonds is 642 basis points (bps).

Compare that to the Australian stock market, another China proxy. The MSCI Australia Index has an earnings yield of 6.83%, which is “only” 313 bps more than the 3.70% on offer in 10-Year Aussie bonds.

Something else to watch: the Tokyo Stock Exchange has been signaling that it’s time to do something about the laundry list of companies that have market capitalizations below book value. The threat: delisting. Bold talk or actual action, we won’t know until maybe next year. But it’s a potential catalyst, as is the Japan-as-China proxy concept and TINA.