The rapid rise in the price of crude oil has increased the risk of inflation even though the flames of the subprime loan crisis are still burning. Financial policymakers are thought to have little room to maneuver. One tiger (a financial crisis) waits outside the front door while another tiger (inflation) is lurking by the back door.

As these events unfold, Japanese stocks stand out because of their strong performance as other stock markets worldwide continue to slump. Investors are slowly beginning to show interest in reevaluating Japan and Japanese stocks. I believe there are two reasons. First is the “quality premium” that Japan receives because of its overwhelming lead in advanced technologies. Rising living standards in resource-rich nations and emerging economies are giving consumers more buying power. And as this buying power grows, the importance of quality high-tech equipment that can conserve energy and resources will become even greater. Investors are now realizing that Japan is a country with an enormous and broad-based pool of expertise involving technologies for high-quality products.

The second reason for the relative strength of Japanese stocks is the large volume of funds available for investments worldwide, irrespective of subprime loan problems. Moreover, oil-producing nations are taking in an extra 150 trillion yen annually now that the price of crude oil has spurted by 50% in only six months. The majority of this massive amount of extra income will flow back to international financial markets. But there are now very few attractive opportunities for investing these funds. During the past year, investors have lost money on stocks, credit instruments, investments in emerging economies and finally government bonds. Commodities have been the only source of profits. But this situation cannot last forever. Investors will always find the next profitable investment theme. I believe that theme will probably be the “global value play.” Basically, this involves the discovery of “value” in the form of the ability to generate consistent cash flows even amid economic adversity. When searching for this value, investors cannot ignore Japanese stocks. These stocks are now considerably undervalued following an 18-year bear market that brought down stock prices more than in any other country.

I believe that the Japanese economy and stock markets are about to come back to life. With the G8 Summit taking place next week in Hokkaido, there is growing interest in environmental issues. Rising attention on these issues should be another positive factor for Japan.