The Sovereign Society might not be universally bullish on stocks in 2008, but we sure love Japanese equities at these levels. Both Mike Burnick and I continue to recommend Japanese stocks - the only major market in the world we view as offering compelling absolute and relative values.

It’s true, that I’ve been too early recommending Japanese smaller companies up till now. Despite amazingly low multiples and generally, strong corporate earnings, Japanese small-caps have not rallied so far. But still, no other global index is cheaper than Japanese smaller companies, and they’re now trading below book-value. From its high three years ago, the Tokyo Second Section Index has plunged more than 50%.

For small-cap bulls, another bullish consumer spending report emerged last week. The report shows consumption grew to 3 ½ year highs, despite rising prices and stagnant employment growth. Household spending grew 3.6% from a just year earlier. That’s a surprise considering the slowdown affecting exports since the emergence of the U.S. economic slowdown last fall.

Japanese consumer spending is responsible for about 50% of GDP. Any marked improvement in domestic consumption is therefore bullish for smaller companies and corporate earnings.

At this point, amid a bear market for global stocks, it’s hard to forecast when Japanese smaller companies will rebound. They’re unbelievably cheap at this point. Long-term investors should view Japanese small-caps as a cheap option with no expiration.

It might take another several months or longer, but eventually, smaller companies in Tokyo will rebound with a mighty 100% rally or more, if history is any guide.

ERIC ROSEMAN, Investment Director

P.S. In our member’s only newsletter, The Sovereign Individual, I’ve recommended several ways to play this coming rally in Japanese small-caps - both offshore and right through your discount broker here in the United States. Those are just two of many investments, our entire team of investment experts recommend each month in our 16-page, investment-packed newsletter. Click here to try a risk-free trial to The Sovereign Society, so you can get the next 12 issues of The Sovereign Individual for our lowest rate ever.