Passports To A Global Portfolio: Japan



Four years after the Japanese stock market peaked, buying stocks in Tokyo is getting to look a lot like triage, the art of sorting out the goners from the wounded battlefield victims that can still be saved. And for good reason. The economy is refusing to respond to $275 billion worth of government spending. Moreover, it's not clear whether Prime Minister Morihiro Hosokawa's coalition can come up with a big enough tax cut to persuade consum-ers to spend more. Most economists thus are looking for no more than a tepid recovery in 1994 after a 0.5% drop in the gross domestic product the year before. Some think the Nikkei stock average, which has already fallen 18%, to 17,300, since late October, could slide to 13,000 in coming months.

Sound bad? You bet. Analysts say stocks of steelmakers, mired in recession and global overcapacity, are going to take a pounding. So may big banks, burdened with billions in bad loans. But don't give up on Tokyo entirely. As Corporate Japan tightens its belt, a welter of restructuring plays are coming to the fore. Nimble companies boasting superior technology, innovative marketing, and no-nonsense managers bent on slashing costs could rebound quickly when demand eventually awakens.

That's what Ichizo Yamauchi is betting on. A director at Kokusai Investment Trust Management Co., Yamauchi now has $900 million in five funds targeting restructuring plays. Among his favorites: Rohm Co., a supplier of electronic components. Over the past year, Rohm has moved production abroad and honed its marketing strategy, cutting out discounting and abandoning marginal accounts. The company's research arm, meanwhile, is now focusing on tailoring products to such big customers as Sony, Hitachi, and NEC. As a result, says Yamauchi, Rohm has the potential to rise as high as $37, from $25 now. Yamauchi also likes Nippon Yusen, Japan's oldest shipping company, which has been quicker than other shippers to take on cheaper foreign sailors and shift paperwork offshore. In addition, Nippon Yusen has built a string of warehouses in various Asian countries with fast-growing economies while also expanding in Antwerp, Milan, and D sseldorf.

UNDER REPAIR. Even some blue chips offer restructuring appeal. To be sure, they may get hit hard if the Nikkei plunges again. But Susumu Kato, chief economist at CS First Boston (Japan) Ltd., counsels against panicking. He still admires the long-term growth potential of big electronics companies such as Hitachi, TDK, and Sony, which have all trimmed capacity sharply. And auto makers have some adherents. For example, Peter Boardman, senior auto analyst with UBS Phillips & Drew International Ltd., thinks Mitsubishi Motors is better positioned than Toyota or Honda to cope with slack demand. Mitsubishi expanded less at home during the bubble years. That has given it the resources, he says, to pursue faster-growing overseas markets with alacrity.

Consumer stocks, a traditional bulwark in down markets, also offer some upside potential. Kato argues that when consumers finally start to come out of their shells, they'll likely start eating out more. So he is recommending Skylark Co., a restaurant chain that has successfully gone down-market, turning some of its Denny's-style family outlets into fast-food joints. And Yamauchi favors mass retailer Ito-Yokado Co., which could benefit if current efforts to deregulate the economy allow the company to open more stores or sell alcohol for the first time.

Investors may also be missing the boat if they ignore the fat profits some Japanese companies are earning in booming China and southern Asia. Nikko Securities Co. strategist Yuichi Matsushita, for example, suggests Murata Manufacturing Co., whose sales of capacitors and other consumer-electronics parts to Chinese manufacturers are rising swiftly.

Another of Matsushita's choices is Yaohan Japan Corp., a big supermarket group whose checkout lanes run from Brunei to Hong Kong. "Retailers and supermarkets will accelerate their move to Asia, I'm sure of that," he says. "In Japan, there's no way to grow." That may well be true. However, that doesn't mean there are no opportunities left in the Japanese market.

                      Recent price
                      per share
      ROHM                $28
      electronics supplier
      SONY                48
      Should gain from 
      weaker yen, U.S. recovery
                      Recent price
                      per share
      ITO-YOKADO          $51
      Big retailer may be allowed to open 
      more stores
      KIKKOMAN              7
      Rising food imports 
      will cut its expenses
                      Recent price
                      per share
      MURATA              $34
      Selling lots of 
      electronics in China
      YAOHAN               11
      Retail chain
      expanding from
      Brunei to Hong Kong
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