In the late 1980s, Japan’s economy was the envy of the world. The country’s meteoric rise to become the world’s second-largest economy coupled with the dominance of Japanese brands such as Sony, Toyota and Kubota gave rise to the term “Japanese Economic Miracle.”

Managers around the world sought to emulate the nation’s manufacturing techniques. Japanese companies and consumers, enriched by their nation’s rapid economic growth, bought up prime real estate and other assets in the United States, Europe and elsewhere.

#-ad_banner-#But Japan’s miracle was built in part on a bubble. In 1989, at the height of the property bubble, choice commercial property in Tokyo sold for more than $20,000 per square foot. Average Japanese homes near the nation’s six largest cities cost the equivalent of 30 to 50 times the median Japanese income, an unsustainable level. Gains in residential and office properties between 1986 and the top of the property bubble in 1991 were even more dramatic than home price gains in the United States during the mid-2000s.

The economic miracle came to an abrupt end in 1991 as the nation’s overheated real estate market collapsed and the benchmark Nikkei 225 stock Index lost nearly a third of its value in U.S. dollar terms in the 1990s, even as stocks in the United States and Europe saw their biggest gains in decades.

The 20-year hangover
Japan continues to suffer under the hangover of its erstwhile boom. The country has continued to suffer from bouts of deflation — a general decline in price across the economy — driven in part by declining property prices in parts of the country, even more than 20 years after the bubble burst. Deflation is particularly damaging to the economy as it discourages credit. When consumers and businesses borrow money they typically post collateral in the form of assets such as real estate or equipment. But in a deflationary environment, the value of this collateral is constantly eroding, making it less valuable as a loan guarantee.

The country has also endured its fair share of political turmoil, with seven prime ministers in the past six years. But on Dec. 16, the conservative Liberal Democratic Party (LDP) won a landslide victory over the left-leaning Democratic Party of Japan in lower house elections, capturing 328 of the 480 seats. According to current polls, the LDP also stands a good chance of winning seats in upper-house elections due next summer.

And this just might be the turnaround catalyst Japan needs…

Is a recovery afoot?
The country’s incoming Prime Minister, Shinzo Abe, has promised major new reform initiatives aimed at reviving Japan’s lackluster economic growth. In particular, he’s promised to push through a government stimulus package worth about $120 billion, mainly aimed at public works and infrastructure investment. In addition, Abe has vowed to push the Bank of Japan to adopt a formal inflation target of at least 2%, pursuing more aggressive quantitative easing until this target is reached. Abe has also stated his desire to see the Japanese yen weaken somewhat to help boost exports.

Abe’s promises regarding quantitative easing and renewed stimulus measures have garnered at least some credibility in financial markets. The Japanese yen has weakened to over 87 per dollar today from 76 yen per dollar in late January 2012, its weakest level against the U.S. currency since mid-2010. That should help boost Japanese exports, and has already pushed up the Nikkei 225 since the beginning of October.

The policies Japan’s PM and central bank are promoting are somewhat controversial. In addition, there are legitimate concerns that a debt-financed government stimulus program would put pressure on Japan’s public finances at a time when the government’s debt is already at over 200% of gross domestic product.

But the U.S. and European experiences suggest that quantitative easing has been an effective tool for pushing up stock prices; note, in particular, the dramatic rally in the S&P 500 after the Federal Reserve announced quantitative easing in the summer of 2010.

I think we could possibly see the same thing happen in Japan. 

Japan’s leadership change is proving a significant and durable catalyst for upside. This lead me to search for possible additions to my High-Yield International portfolios, so I looked for Japanese stocks trading as American Depository Receipts (ADRs) in the United States with average daily volume of more than 5,000 shares and a dividend yield of 4% or higher.

Here’s what I found… 

Action to Take –> My High-Yield International portfolios currently have little exposure to Japanese stocks. But in a recent issue, I profiled cosmetics giant Shiseido (OTC: SSDOY) as a potential new portfolio addition. New product lines and management’s in-store initiatives should support a recovery in sales for Shiseido in Japan, while the country’s longer-term growth prospects in China remain impressive. Shiseido, along with the other stocks on this list, are worthy of further consideration for any income investor looking to add a little geographic diversification to their portfolio and take advantage of what (finally) looks to be a recovery in Japan.