Land of Rising Opportunities for Investors : Investing: There are signs that Japan’s economy--and thus its stocks--will bounce back in 1993. But caution is advised.

The past few years have been a nightmare for investors who plowed money into the Japanese stock market through a growing number of Asia-oriented mutual funds.

Thanks to a slowing economy and disappointing corporate earnings, Japanese stocks have fallen steeply from their late-1989 peak. As a result, mutual fund investors have seen their shares decline an average of 25.5% the past year, according to Lipper Analytical Services in New York.

That makes Japan funds the worst performing group out of some 30 equity-oriented mutual fund categories tracked by Lipper through Thursday. When compared to high-performing groups, such as U.S. financial services funds, which have risen nearly 32% since last June, the results are even more depressing.

Yet many stock experts and fund managers say that the Japanese market is due for a lift, and that some mutual fund investors may want to tiptoe back into Japan and Pacific region shares.

Few advise jumping in precipitously, however. Battle-scarred mutual fund managers and analysts are decidedly cautious when talking about returning to Tokyo after its near-relentless declines.

“I think there are opportunities if one approaches Japan with a cautiously optimistic position,” said Ned Riley, chief investment officer at Bank of Boston.

There are several reasons that Japan and Pacific Region funds may be worth a look, market experts say.

Some believe that Japan’s economic woes are likely to recede in 1993 when a variety of government spending programs and long-heralded demographic changes start to take hold.

Specifically, the Japanese have allocated $450 billion to rebuild the country’s infrastructure, which should start boosting employment and personal income in related industries, such as construction and telecommunications, the next two years, Riley said.

Japanese consumers are also starting to spend more, which bodes well for consumer-products companies. And finally, Japan is sure to benefit from the advances of other Asian economies at a time when Southeast Asia is seen as possibly the most dynamic and promising part of the world.

But there are plenty of risks associated with investing overseas--particularly in Japan.

Many Japanese stocks still sell for nearly 30 times earnings, said Helen Hayes, co-manager of the Janus Worldwide Fund in Denver. That’s down from years past, but it’s still lofty compared to multiples in the United States and other world markets.

The comparatively high prices are the result of growth expectations that could be shattered if the Japanese economy doesn’t rebound as expected, analysts said. And that rebound could be jeopardized by what may be a brewing banking crisis.

Japanese banks, long the envy of the international financial community, have been bolstered in past years by high prices for both stocks and real estate. Banks made real estate loans and bought stocks for investment.

But both real estate and stock prices have plummeted, and many observers fear that Japanese banks will find themselves short of money to lend. That could precipitate a credit crunch similar to the one that has hampered the U.S. economy the past two years.

Finally, those who invest outside the United States, whether individually or through mutual funds, also face currency risk. If you buy Japanese shares when the dollar is weak and then sell, converting your profit into U.S. dollars when the dollar is strong, you could lose money--even if the stock rose in value.

Some mutual funds try to hedge against that risk, but it’s tricky. Most say investors just have to accept currency fluctuations as a potential cost of investing overseas.

On the other hand, many analysts think companies and economies in Asia are a better bet in the years ahead than their Western counterparts.

“Their companies are growing faster,” said Dana Martin, portfolio manager of the Fidelity Pacific Basin Fund. “In theory, that means you should be making more money on investments over the longer term.”

Added Riley: “Over a two- or three-year time frame, the opportunity is probably better in the Japanese market than the U.S. market.”

Nonetheless, no one wants to say whether Japanese shares have hit bottom. So even bullish advisers suggest that investors go slowly.

“We are big fans of dollar-cost averaging,” Martin said. “If you were thinking about putting $100 into Japanese stocks, I’d suggest you put in $10 now and average your way in throughout the year. This market could still go down another 10%, but we are getting to the point where there are a few stocks that look relatively cheap.”

Investment in Japan Many analysts think Japan will be a good investment in the years ahead, but for investors, the past 12 months have been tough. Selected mutual fund performance by industry group:

Percent change Fund 12 months Japanese funds -25.52% Pacific Region funds +2.69% European region funds +11.28% Utility funds +16.99% Financial services funds +31.63%

How some individual Japan and Pacific funds fared:

Percent change Fund 12 months The Japan Fund -20.95% GT Global Japan -28.78% Fidelity Pacific Basin -6.99% Putnam Asia Pacific Growth +1.21% GAM: Pacific Basin +5.26%

Source: Lipper Analytical Services