JAPANESE fondness for Louis Vuitton luggage, Fendi handbags and Hermes ties is hardly news, but enthusiasm for European luxury goods has now gone beyond buying fancy Swiss watches. Investors have started buying into the companies that make them. It is a small part of a big development: the tentative return of Japanese capital to the world.

At the end of the summer, Nomura set up what it saw as a niche fund of premium brands, run from Geneva but marketed only in Japan. Within a couple of weeks, the Nomura Pictet fund had $650 million (£340 million). One banker told me that they closed the fund, refusing $1.5 billion of interest.

With hindsight, this experimental fund was a no-brainer, a reap-what-you-sow opportunity for Japanese people to invest where they shop. But, looking ahead, it heralds a wave of Japanese savings looking for attractive returns abroad.

Japan’s baby-boom generation hits retirement age next year. Almost 1.5 million new pensioners a year over the next few years will be looking for places to invest the average £83,000 lump sum that they get on leaving the workforce. One option is to put it on deposit in Japan, for 1 per cent interest. Another is to pour money into the cobblers, milliners and watchmakers of Europe.

With growth back to 2 per cent plus, Japanese corporations as well as retail investors are returning to the world markets without full confidence but with more than curiosity.

In June Nippon Sheet Glass paid £1.8 billion for Pilkington, the glassmaker. Last month the state-backed Japan Bank for International Co-operation announced plans for Islamic finance, starting with an issue of bonds in Malaysia. Last week Nomura agreed to buy Instinet, the electronic brokerage, for an estimated £530 million.

Investment abroad is still tiny given the size of the economy. Japanese households had built up a net worth of £9,500 billion, of which £6,200 billion was held in financial assets. Few of these huge holdings are non-yen denominated.

Even the recent interest in investments abroad is understandably hesitant: memories of the Rockefeller Centre, MCA and Pebble Beach, over-priced purchases made when Japan seemed unstoppable, still haunt investors in Tokyo. But Japan’s reviving interest in foreign assets is not only good news in Europe and the US, it is essential to revival in Japan.

So far, Japan is enjoying only anaemic revival. Wages are flat and consumption inhibited. While the Dow Jones breaks into new territory, the Nikkei still trades 58 per cent below its 1989 peak.

A robust recovery needs the interests of shareholders trumping traditional corporate structures, historic property holdings, classic corporate- labour relations and the priorities of Japan Inc. A fundamental shift in expectations would be needed for shareholders to assert their interests, Investment abroad should help: one European financier seeking deals in Japan but frustrated by the obstructive introspection of Japanese companies hopes that when people get a taste of investments abroad, they will come to expect more of their holdings at home. Japanese investors, he says, “are not exposed to the beauty of the returns given by equities outside Japan”.

Private equity firms also look poised to teach Japan a lesson in the primacy of shareholder interests. KKR, Permira, Bain, Silverlake, Carlyle and Cerberus are already in Japan. Tokyo bankers are hoping to see Apollo, Blackstone and Advent move in, too. In theory, Japan should be rich pickings for private equity: the corporate landscape is dotted with conglomerates, bureaucratic head offices and skilled manufacturing operations ripe for restructuring by private equity groups accessing easily available Japanese debt.

Prices, too, are reasonable by European and US standards, Private equity investment accounts for 0.15 per cent of GDP in Japan, by comparison with 1.17 per cent in the US and 1 per cent in Europe. As any private equity banker in Japan will tell you within a minute of meeting them, this is the land of the Shinsei Bank, once Long-Term Credit Bank, which was rescued by Western investors led by Ripplewood, of the US, which put in $1.2 billion and, at a conservative estimate, took out $3.7 billion four years later.

Engagement with the outside world, once again, offers the best hope of reinvigorating Japan. Investment in assets outside Japan and outsiders investing in Japan will encourage the country to put its lazy capital to work — and keep Japanese in luxury goods for years to come.

Everything’s coming up Rose’s

INVESTORS and rivals alike should stand back and salute Stuart Rose. Shareholders who bet on him rather than take Philip Green’s cash have waited a long time for the group to restore its glories, recover its flair and reawaken its talent for innovation, but their patience has been rewarded. Sales are rising strongly and profits are singing. For a cautious man, Mr Rose is confident about the crucial midwinter season. Some brokers even envisage a return to £1 billion pretax profit in the current year, let alone 2007-08.

Wisely, Mr Rose is not claiming that the job has been done, only that it is moving on. M&S is back to more than 10 per cent of the clothing market, but that is as much a challenge as an achievement. Last time that M&S profits reached £1 billion, the board responded to market saturation by opening more of the same space at home and buying big in America. Mr Rose is expanding space, too, but not just more of the same: food outlets at petrol stations, bigger relocated stores and new lines. Some, such as hot food, sound more promising than me-too electrical goods.

M&S is bound to follow as well as innovate because Tesco gained such a lead in the bad years. The best aspect of Tesco to copy, however, would be its skills at expanding abroad to prepare for lower growth, or the next downturn. The UK high street is a fickle place.

This time, a repeat of the home-from-home M&S stores round European capitals will not do. M&S needs to choose its own locations carefully in fast-growing markets and control its own stores so that they become profitable growth centres, not just embassies abroad.

• Robin Buchanan is a curious choice to succeed Laura Tyson as Dean of the London Business School. More people go from business school to management consultancy than the other way round. Mr Buchanan, Bain’s UK senior partner, has enviable business experience, is an MBA from Harvard and a chartered accountant: valuable for fundraising and running the LBS. But he is not an academic, an economist or a name. Tyson, ex-White House, was all three. LBS has a key role in training and supplying talent and ideas to UK business. Mr Buchanan has a lot to live up to.

  james.harding@thetimes.co.uk

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