After two decades of economic malaise, Japan is well into a recovery touching every segment of the society, according to Hennessy Funds, the San Francisco-based mutual fund family, which has two vehicles dedicated to the country.

Neil Hennessy, the firm’s portfolio manager and chief investment officer, gave an overview of Japan’s comeback at a press briefing in New York on Wednesday. Hennessy’s large-cap Japan fund, mainly an institutional product, is up approximately 16% in dollar terms for the year, and the small-cap fund was up 17% year to date. The two portfolios are in the top ranks of Japanese funds at both Morningstar and Lipper.

While the U.S. financial crisis began in 2008, Japan began suffering its crisis 20 years ago. “If you only looked at the negatives, which are many,” Hennessy said, “you would not invest in Japan.” But he said there are now a lot of positive signs, many of them coming from the country’s less-inflated currency.

“Everybody is concentrating on the yen because of its move to parity with the dollar,” Hennessy said. “Structurally, things have been changing in Japan for the last three to 15 years. Japan is entering a true bull market now, which has a lot to do with quantitative easing by Japan’s Central Bank. People continue to say we’ve seen this in the past. We did this and nothing happened. I’m here to say that a lot is happening.”

He said that the country’s financial system is in great shape. “Corporations are in great shape. Cash flows are at historical highs, tourism is on the rise, and the government truly wants companies and individuals to prosper.”

He also mentioned that companies in Japan have been slimming down and cutting costs, as well as holding on to cash like their U.S. counterparts.

Currency: The Missing Piece

“The only piece of the puzzle that was missing was a weak currency. Now that the yen has weakened to this extent, corporate profits in Japan over the next 12 months should increase somewhere between 40% to 50%,” he predicted.

Shuhei Abe, president and CIO of the Tokyo-based SPARX Group, the sub-advisor of the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund, gave an overview of the investing landscape in Japan. Abe founded the SPARX Group in 1989 and oversees $6 billion in assets there.

He said he believes that Japan will continue its upward trend because of the weaker yen and that this will bolster the earnings of Japanese companies, whose previous focus has been on cost reduction and growth strategies in overseas markets.

He also noted that Japan is experiencing political stability under Prime Minister Shinzo Abe, now in his second term. In addition, the government has committed itself to funding and implementing a full-scale reconstruction that will strengthen the country’s infrastructure following the 2011 Fukushima earthquake and tsunami.

“We’re at the start of a new super cycle,” Abe said. “From 2008 through 2012 was a tough time for Japan. The yen was stronger. Unlike other central banks, Japan’s central bank didn’t do anything compared [with the stimulus programs] of the U.S. and other central banks.”

“The real challenge for Japan is where the markets go from here,” Abe said. He forecast that Japan’s growth rate will reach the highest level over the next two years and that the real force of the reconstruction effort is expected to take place over the next three to five years, “when earnings per share of companies are expected to grow by 38% or more.”

Meanwhile, domestic car production and Japanese housing starts are high, and Japanese consumption is expected to recover as working hours pick up. Savings are currently at historic highs for Japanese citizens.

Masakazu Takeda, portfolio manager of the large-cap Hennessy Japan Fund since 2006, outlined the criteria for investing in the fund, which owns about 20 stocks. He said he looks for simple, easy-to-understand companies that can grow regardless of economic conditions. “We don’t like companies with a lot of debt,” he said.

These businesses must also have a durable competitive advantage and sustainable above-average returns on equity and earnings growth. His favored names must also consistently generate ample cash flow and have smart management.

In sum, he said, “Our portfolio consists of companies we believe are going to be the next wave of emerging global businesses out of Japan.”

The Hennessy Group, with $3.5 billion in assets under management, consists of 16 no-load equity mutual funds, including the large-cap and small-cap Japan funds, which each have $26 million under management.