Is the five-year hex hanging over the Tokyo Stock Exchange finally lifting? There's no denying that something is afoot, what with the Nikkei Stock Average up 33% from its 1995 low of 14,485. But after a year of runaway yen appreciation, price deflation, and bank failures, it's hard to be optimistic.
Still, even Tokyo gloom merchants see some signs of a modest recovery. Longtime skeptic Edwin C. Merner, who manages about $1 billion for Schroder Investment Management (Japan) Ltd., thinks the Nikkei could jump 15% in the next 12 months and gain a further 20% in 1997. "Right now, we are looking at a cloudy sky with patches of blue," he reckons.
CHIPMAKING CHIPS IN. The sunny spots include greater currency stability and an end to Japan's four-year run of economic stagnation. The dollar-buying rescue missions that the Bank of Japan and U.S. Federal Reserve have undertaken since this summer have managed to push the superyen from 80 to the dollar to a remarkably stable rate of about 100. Just-released corporate earnings vaulted 28% in the half-year period ended in September. And most economists think that Japan will achieve gross domestic product growth of 1.6% or so in 1996.
Perhaps in anticipation, foreign investors have plowed more than $30 billion into the Tokyo bourse during the past six months. Fund managers suggest looking for companies that have a technological edge, market-share clout, scads of cash, or real turnaround potential. In high tech, the global boom in semiconductors and personal computers is benefiting several Japanese companies. Schroder's Merner likes Nikon Corp. and Canon Inc. Best known for their cameras, these companies are also major purveyors of semiconductor components. Indeed, the chipmaking explosion worldwide should drive Canon's chip-equipment sales up 60% this year. Ditto for Tokyo Electron Ltd., where more than 50% of its $2.5 billion in annual sales now comes from semiconductor equipment.
CD-ROM ADD-ONS. Foreign investors have flocked to flagship electronics makers such as Toshiba Corp. and NEC Corp., which James Capel Inc. analyst Jason James points out are ringing up 15% to 20% annual gains in semiconductor sales. Another favorite is Mitsumi Electric Co., a maker of CD-ROM add-ons that has already shifted 60% of its production to cheaper sites abroad. "Every personal computer now needs a CD-ROM," says Ian C. Burden, director of HSBC Asset Management Japan, who has placed about 20% of the $1.2 billion that he manages in Japanese electronics and high-tech companies.
There are even some gems within Japan's battered banking sector, thanks to historically low interest rates that have allowed lenders to borrow their money at close to 0% and then plow it back into Japanese government bonds yielding about 2.6%--or else into foreign debt with even richer spreads. Sumitomo Bank Ltd., after writing off $2.8 billion worth of bad loans last year, has emerged as the most profitable city bank. Analysts also like regional Shizuoka Bank Ltd., which Moody's Investors Service ranks as the most financially sound of all Japan's banks.
The Tokyo market remains risky. Commercial land prices are still tumbling, bankruptcies are up, and the banking system makeover is just beginning. Also, warns Barclays de Zoete Wedd Securities Ltd. analyst David Pike, "should the yen strengthen again, we would certainly see this little [stock] bubble burst." But after five years of unrelenting gloom, the recent upturn is a welcome relief--and a reason to bet on the future.