For two years now, investors have been told that Japan provides the most value of the Asian markets. Due to its relative market under-performance, investors keep waiting for the world's second-biggest economy to awaken. On the one hand, today's news of a record high in industrial output, helped by auto and semiconductor output, certainly is a good sign signaling Japan's economic growth potential. On the other hand, many analysts are worried due to a huge slowdown in the housing construction industry that the economy is going to sink back into recession. We think the U.S. has a housing construction problem, it pales in comparison to what's happening in Japan.

Due to regulation (is it ever productive?), Japan's housing starts tanked 44 percent on the year in September, the worst drop ever. The brilliant revision to Japan's Building and Standards Law has forced construction companies to wait months for approvals. The big question is whether this real slowdown in the construction industry will dampen economic investment within the broader economy?

Coupled with a stronger yen, which is slowing exports into the U.S., and more government regulation, the constant drum-beating of analysts to invest in Japan looks like it will continue to be good money chasing bad.

On the other hand, if the yen were to weaken and we can get the government to stay out of economic affairs, then investors should turn their attention eastward.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer holds no position in any stock mentioned as of 11/21/07.