Editor’s notes: These are views, originally sent out in an investment note, from Tom Becket, the chief investment officer at Psigma Investment Management. The views expressed are those of Becket and his firm and not necessarily shared by this publication.

Traitor! Turncoat! Judas! This week we committed an act of treachery by recommending that our Investment Managers reduce their Japanese exposure. Having benefited from an explosive period of performance from the Land of the Rising Market in the last six months, we decided that Japanese stocks had risen too far, too quickly, whilst the yen had gone the opposite way.

Our view remains that there is opportunity aplenty and more to come from Japan, but in the short term we are more cautious and believe it is right to reduce our long Japanese exporters/ short the yen trade.

The chief reason behind our (possibly premature) call is that we are now finding it very difficult to assess the fundamentals and valuations of Japanese stocks. When we last rang our cracked bell calling for better days for Japan (read the blog here) we knew that stocks were cheap. However, since then the market has gone parabolic (up some 70 per cent-plus from the lows) and it is much harder to gauge what price we are paying.

Our view was that TOPIX earnings would increase by 40 per cent in 2013 and the market would reflect this improvement in a comparable gain. Now we feel that earnings could rise 70 per cent, again reflecting the market move from the November lows. But where does that leave Japanese valuations? Having spoken to Japanese experts this week, we would “guess” at around 14-15 times earnings; neither cheap nor expensive. But this is no longer an “asymmetric” trade and risks have grown as the market has recovered.

That being said, we expect earnings to continue to rise in the years ahead, as the Japanese economy continues to heal with the hyperactive Abe-san and Kuroda-san on the bridge. The “three arrows” strategy is taking shape and recent economic data and confidence surveys from Japan have been on an improving trend. As a nation, the Japanese seem well up for this fight. The story is not over, but is probably due an interval.

What makes us worried about reducing Japanese equities? “A lot”, is the short answer. You can add coward to the list of insults I threw at myself at the outset of this blog. Global institutions are still markedly underweight Japanese stocks, which will be getting ever more painful the further the market spikes. Investors are talking the talk about Japan, rather than walking the walk back in to the world’s second biggest equity market. There are polls showing that optimism towards Japan is now higher than anywhere else on the planet, but fund flows in to stocks are still far from a flood.

In fact they are more of a drizzle. Yes, we are seeing the domestic “mom and pop” investors buying shares, but key Japanese domestic institutions are still selling, as dictated by their antiquated asset allocation models. Either this means that they don’t believe the story themselves or a big buyer is yet to start buying. Why is Japan never easy? There also seems to have been a shift in the Bank of Japan’s thinking about the yen and a tacit agreement to potentially let it fall further than the 105-110 Y versus the dollar target that we believed likely. In that case the likes of Toyota, Canon et al. probably have further to run immediately. Indeed, the very smart Tim Bond of Odey, who runs the Odyssey fund we own for our clients, believes the Nikkei will smash through 18,000 (currently 15,000 and change) in a straight line, without a pause for breath.

Our latest strategy is to do something that investors have rarely had the opportunity to do in the last two and a half decades and to take profits in Japan, whilst maintaining a decent exposure. The export trade has worked in recent months, but the next leg of the Japanese rally should be a reflation trade of domestic companies.

Indeed, Simon Somerville of Jupiter fame, our core manager in the asset class, has added to domestic stocks at the expense of the externally facing companies in the last few weeks. In due course we will increase our exposure again to Japan, but for now it is time to say “arigatou”.