NEW YORK (CNN/Money) - For 16 years, international fund manager David Herro has mostly steered clear of Japan.

He thought the stocks were "ridiculously" overpriced when the Nikkei was trading near 40,000 in 1989. He wasn't fooled 10 years later, when some companies soared on the coattails of the U.S. tech boom, sending Japan funds up an average of 110 percent. And he didn't bite when the Nikkei rallied for a few months last year on the hopes that then-new Prime Minister Junichiro Koizumi could initiate true reform.

Now, with the Nikkei trading around a modest 11,976, there are once again whispers that Japan will rise from its funk. But this time -- though he still is skeptical of a full fledged rally -- Herro has been buying, with 9 percent of his Oakmark International in Japan stocks.

The Bank of Japan upgraded its outlook for the economy last week after a report showed the economy grew 0.6 percent in the first quarter -- it was the first gain in more than a year. The Nikkei jumped to a nine-month high following the news.

Still, Herro cautions against betting on broad market rally. The underlying problem, said Herro, is that Japanese companies are not focused on shareholder value. They live by the Japanese tenet of "saving face," prizing decorum over profits. (For example, they may ignore serious management problems but spend a lot to upgrade headquarters, said Herro.) Japanese firms also tend to sit on big piles of cash, not the most productive use of assets.

"A lot of people have been asking me recently, 'Is now the time to invest?'" Herro said. "Until you see structural changes in Japan, a true turnaround will not occur."

That said, Herro is finding individual companies where he sees signs of reform. One, Meitek, is a profitable engineering placement firm. It's gaining market share and will benefit if there is restructuring in corporations because there will be a greater need for temporary workers.

Herro also likes Daiwa Securities, which has "come clean on liabilities." For example, Daiwa has written off overpriced real estate, he said.

He had no exposure in Japan in the fund at all three years ago; it has slowly crept up since then. The fund, with $1.3 billion in assets, is up 14.9 percent year to date as of May 28, according to Morningstar, putting it near the top of its category.

Japan funds are up an average of 12.9 percent this year, according to Morningstar, making them a tempting option. But if you chase those returns, you could get stung if the rally fizzles like the previous ones, said Gregg Wolper, an analyst at Morningstar. There are 23 funds that invest exclusively in the country, down from a high of 28 funds in 1999.

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"There have been a number of times the market has rallied and then gone back into the doldrums," Wolper said.

The better move, he said, is to pick a diversified international fund and let the manager figure out which countries are the best investing options. (For more on why international funds are soaring, click here.) One good bet is Harbor International, up about 10 percent this year, with a 6 percent weighting in Japan. Another is Liberty Acorn International, up about 6 percent, with a 10.6 percent Japan weighting.

If you do believe this is really it for a turnaround in Japan, stay away from individual stocks. Instead, Wolper said, consider an exchange-traded fund, such as iShares MSCI Japan Index, which will give you exposure to all of the best-known large cap stocks. Or, if you want aggressive tech names, try Credit Suisse Japan Growth. For small-caps, a good bet is Fidelity Japan Smaller Companies.