Japanese bonds still hold little attraction for pension funds. The equity market, however is showing promise, despite major problems" in some regulated sectors which are holding the market back, says Roy Peters, head of pensions investment at British Gas. There are certainly major problems in the financial sector, he says, "which will take time still to resolve".

Looking at the year as a whole he is expecting a pretty good return on the fund's equity investments, assuming the currency stays "broadly where it is".

"From a standing base, taking currency into account as well, I think we could be looking at a return possibly as high as 20%," he says, pointing out that half of that has probably already been achieved.

British Gas Pension Fund's 4.5% allocation to Japan is invested solely in equities, due to the negative case for bond yields. Peters sees no attraction whatsoever in the bond market. "The yields historically are very low in Japan, and even now you expect a very low inflation rate, the real yields still look very low by international standards."

Sudhir Krishnamurthi, principal investment officer of the $9bn World Bank Pension fund agrees on the disappointing performance, although the fund has ventured to invest 2.5% of its total plan in the Japanese bond market with 10% invested in equities.

"Given where bond yields are at the moment, we don't see that as a great opportunity," he says. "In terms of bonds we are looking at them in terms of US dollar investors rather than as yen investors, so from that point of view there are some opportunities to be made getting into yen and then hedging our funds back into US dollars."

He expects equities to do reasonably well, with a maximum prediction of the Nikkei "hitting 22,000" over the next six to eight months, though he feels that is optimistic.

The World Bank pension fund is underweighted in bonds and equities, though Krishnamurthi hints at some room for improvement: "We are underweight as relative to other equity markets, we don't see Japan giving us quite the same returns, although more recently there seems to be some move, though we are not sure whether this is sustainable or not."

Similar to Peters' reservations on the state of the economy, Krishnamurthi points to the regulated sectors as a negative factor: "The industries which have been more regulated, the financial sectors especially - those are the areas where we would have some cause for concern, at least in the short term."

However, he feels exporters will fare better. "The export-oriented sectors are going to look pretty good and that's basically because of where the yen is at the moment and many of the export-oriented institutions, including all their computers, semiconductors and machinery industry - all of them are global institutions so we expect them to do very well."

"It is very clear already that Japanese companies have been doing very well, particularly those dependent on Japanese trade," agrees Peters. "So we are already seeing a very strong improvement in profitability from a number of the international manufacturing companies. We think that's sustainable" Rachel Oliver"