Barack Obama visited Japan, last week, on the first leg of his Asian tour. The reason for selecting Japan, as the first stop, was more to do with courtesy than its centrality in US strategic plans. China is, of course, the primary focus of American attention.

But Japan is not unimportant either, and relations have soured recently, particularly after the election of the Democratic Party of Japan (DPJ) to power. After winning the popular vote on August 30, they formed a government bringing to an end the hegemony of the Liberal Democratic Party that had held sway for over 50 years with only a brief interlude in opposition.

The DPJ have promised transformations on both the domestic front and in foreign policy. However, we have yet to see how much resolve they can muster. Past experience indicates that implementing change in Japan is an arduous endeavour. Indeed, they may face more difficulties in their task than Obama has encountered in the US, trying to carry out his programme for change.

Since 1946 Japan has marched pretty much in step with the United States. And for many years it has been an arrangement that has benefited both parties. After the Second World War, the US, as an occupying power, refashioned Japan's political system and significantly altered its economic structures.

At first, the intention was to transform the country into a non-threatening semi-agricultural economy. But the communist victory in China altered all calculations. The goal became to build Japan into a strong bulwark against the perceived communist threat. Thus began the industrial modernisation of the country. The Japanese took the best of American technology, production processes and organisation theories and perfected them.

What's more, the US allowed Japan easy access to its domestic market to sell their products. Pouncing with gusto, Japanese firms took full advantage of this opportunity, devastating a number of American industries. In return Japan became a sort of client state, aligning itself politically with US demands. But, today, with the rise of a multi-polar world and diminishing US hegemony, Japan is re-examining the benefits of the relationship with America and looking to further its own interests.

The Japanese economy never fully recovered its former vigour, after the bubble burst in 1989. But right after the crash, it wasn't at all clear that its future would be so problematic. On paper, the economic characteristics were sufficiently positive to encourage observers and policymakers that a full recovery was in the cards. The authorities splurged, introducing a number of measures to boost activity and reduce the pain of adjustments.

But after initial success, the economy developed some nasty features that have lingered on: slow growth, intractable government finances, zombie banks and crony capitalism. As some people have noted, the situation in the US is not too dissimilar to Japan's state of affairs 20 years ago. History does not repeat itself but it is wise not to become too arrogant about easy solutions to the current problems.

The Japanese economy has suffered from perennially weak domestic demand, relying primarily on exports as the main engine. In addition, the composition of exports is concentrated in those sectors that are highly geared to global growth. This makes the economy very cyclical and a beta play on changes in global activity. So, despite that fact that Japan's export sector as a proportion of total GDP is actually rather small, the economy is prone to swing up and down, in tune with world growth.

Not surprisingly, the economy contracted substantially in the recent recession. But because the global rebound, thus far, has been fairly modest Japan hasn't been lifted up as much as would normally happen in a full recovery.

Stimulative policies are in vogue in Japan as elsewhere, and any indication that they may be withdrawn is poorly received by the stock market. The central bank shifted to neutrality in July, ending monetary easing. As a result, the monetary conditions index is now tighter in Japan relative to the US. And this is one of the factors causing negative sentiment towards equities.

But there are also a number of other issues engaging investors' attention. There is unease about the direction of the new government's economic policies. They are considered to be ideologically to the left of the outgoing administration and their reform agenda hasn't gone down too well with investors.

Meanwhile, recent corporate actions have solidified the view that management continues to be unfriendly towards shareholders. And, then, there is concern about the government's enormous fiscal deficit and the demographic problem of a rapidly ageing population.

Corporate earnings have not recovered as much as they have done elsewhere in the world. At the same time, the strength of the yen increases worries that exporters' earning power will be curbed.

So Japan's stock market, whether you take the Nikkei 225 or the broader Topix index, has been a huge underperformer. Since the beginning of the year it has been pretty much one way down, relative to any of the major global indices. On some measures, such as price-to-book, the market is now a value proposition. But there is no dearth of value elsewhere in the world for Japanese stocks to cause much salivation among investors. And in the past, value players have often fallen into the Japanese trap, finding it expensive to get out. Nonetheless, at present, given the enormously negative sentiment, there must be some contrarians eyeing the market. Plunging in is another matter.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com