Recent volatility in the Japanese stock market following concerns over potential hidden losses at Internet company Livedoor has done little to change the view of many Japan mutual fund investors that Japan's economy is still fundamentally strong, The Wall Street Journal reports.

Past Japanese corporate scandals, particularly in the banking industry, are still fresh in the minds of investors, and the most recent trouble may scare retail clients sensitive to more bad news.

However, big institutions with a long-term outlook on their mutual fund investments are likely to view the Livedoor scandal is a company-specific, one-off issue, and not an indication of other more entrenched problems in the Japanese economy.

For most in the industry, Japan has proved to be a very profitable investment, and its markets are still up significantly despite the recent falls. U.S. mutual funds that invest there increased, on average, by 33.6% in 2005 according to Lipper, with investors pouring around $15 billion into Japan funds over the last six months alone.

ProFund's Ultra Japan Fund, which opened in 2000 and aims to double the return of the benchmark Nikkei 225 daily, expanded from $50 million in August to over $350 million by November. According to Morningstar, it was the top performer of all U.S. funds at the end of last year, gaining 72% between those four months.

While the recent events may slow the flow of retail money into traditional Japan-oriented mutual funds, the hope of managers eager to attract fresh capital is for a quick resolution to Livedoor's woes and limited fallout in wider Japanese financial markets.

However, the longer the downturn lasts, the less likely investors will be to invest in Japan funds going forward. Key funds to watch over the coming months include the Fidelity Japan Fund, the Fidelity Japan Smaller Companies Fund and the iShares MSCI Japan Index Fund.

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