In Japan these days, the bad news never seems to end. The Kobe earthquake, runaway yen, plunging prices, and terrorist gas attacks have dampened consumer confidence, crimped a corporate earnings rebound, and sent the Nikkei stock average tumbling 20% so far this year. With many analysts predicting the average could fall below 14,000--an 1,800-point drop from the current level--trading volume is so low that you could find more action at a penny-ante poker game. "I think the outlook is appalling," grouses David Pike, equity strategist at Barclays de Zoete Wedd.

Most economists believe Japan's gross domestic product will grow no more than 0.5% in the fiscal year ending next Mar. 31. Even the few remaining bulls are getting edgy. One of them, Merrill Lynch & Co. chief Tokyo economist Peter Morgan, recently slashed his GDP forecast from 1.7% to 1% after news that inventories were up for the fourth straight month and unemployment had jumped to a record 3.2%. Unless the yen suddenly weakens, he says, "we are going into a recession."

LOOK FOR CASH. Does this mean you should shun Japan? Maybe not. For the most intrepid of investors, the Tokyo stock market offers a number of plays on companies that will probably come through the hard times in solid condition.

To find them, look for corporations with a technological edge, pricing power, and scads of cash. One such company is Kyocera Corp., whose shares also trade on the New York Stock Exchange via American depositary receipts. Kyocera is the world's largest manufacturer of ceramic packaging material that encases semiconductors. It also makes cellular-telephone handsets and owns 22% of DDI Corp., a fast-growing cell-phone carrier with a stock that is also on many buy lists. S.G. Warburg Securities Ltd. analyst Barry Dargan thinks Kyocera's profits will jump 19% in the current fiscal year. Other pro picks: Rohm Co., a big maker of semiconductor components that is riding the global chip boom, and Tokyo Electron Ltd., a thriving trading group and maker of semiconductor manufacturing equipment.

Do video games appeal to you? To William L. Wilby, manager of the Oppenheimer Global Fund, the name to watch is Nintendo, one of his "favorite stocks in the world." Nintendo shares are down 80% from 1993, and the company has further annoyed investors by delaying the rollout of its Virtual Boy product line until after this Christmas. But Wilby predicts an earnings turnaround in 1996 or 1997. Meanwhile, the company is sitting on $3.65 billion in cash--40% of its market capitalization.

Nintendo isn't the only Japanese company rolling in dough despite tough times. Take Toyota Motor Corp. With a cash cushion of $25 billion, the auto giant probably could weather a 50-yen dollar before it feels real pain, says Lehman Brothers Inc. analyst Koji Endo.

THIN ICE. Another way to play the depressed market is to look for companies selling at steep discounts off Tokyo's Alice-in-Wonderland valuations. Merrill Research Director Hiroshi Nakagawa finds no shortage of good companies fetching a third of the average price-earnings ratio of 70. He recommends Sankyo Co., Japan's No.2 drug company. Its new antidiabetes medicine, Noscal, could bring in $1 billion annually after its scheduled release later this year. Nakagawa also likes Yamanouchi Pharmaceutical Co., which is active in antibiotics, cardiovascular drugs, and ulcer agents.

But don't get carried away. With the Japanese financial sector on the ropes, banks and life insurers are selling stocks at every turn--meaning that the market could lurch lower at any moment. If you're willing to shoulder the risk, however, Japan offers some opportunities. When the economy eventually turns the corner, the white-knuckle ride may have been worth it after all.

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