Japan has shown more verve in its economy in the last year than it has in seven years, sending the long-dormant Tokyo stock market up some 40%. That leaves investors wondering whether there's much growth left. The short answer, say market pros, is yes. Consumer spending is loosening up. Companies are hiring, shrinking the jobless rate to a three-year low. And Japan's central bankers, keen to keep the engine chugging, won't raise the superlow domestic interest rates anytime soon.
So what's the best way to play the comeback now? Betting on companies that are little-known outside Japan -- but available to outsiders through American depositary receipts -- might be smart. Institutional investors and analysts recommend focusing on companies poised to gain from gathering strength in Japan's consumer spending and in restructured sectors such as finance. Aiful Corp. (AIFLY), a consumer-finance giant trying to boost credit-card use in cash-oriented Japan, hits both targets. Since March, its ADR price has jumped 14%, to nearly $27 a share. More growth is in store, says portfolio manager Andrew B. Johnsen of Mellon Financial Corp.'s (MEL) Boston Company Asset Management unit. Aiful is "one of the best-run firms of its kind," says Johnsen, who manages or advises funds that own shares in it.
Overall, the once-troubled finance sector should show hefty gains. In the last year the ADR of longtime laggard Mitsubishi Tokyo Financial Group (MTF) has doubled in price, to $8.53. Sumitomo Trust & Banking Co., which has acquired troubled banks, has seen its ADR, worth less than $4 a year ago, rise to $6.30 now. The argument for growth: The companies that have cleaned up nonperforming loans will share in economic expansion.
The banks are prospering, too, in such sectors as housing, insurance, and real estate. Sekisui House Ltd. (SKHSY), whose ADR has jumped from less than $8 to about $11 in the last year, is in a good spot to thrive on rebuilding high-end residential housing. Life insurer and leasing giant Orix Corp. may have room to grow, even though its ADR has more than doubled in the past year, to above $56, in part because it's dabbling in real estate through a real estate investment trust it created.
Investors anxious about monitoring such holdings long distance might try an index fund that reflects the overall Japanese market. The iShares MSCI Japan (EWJ) fund from Barclays, based on the Morgan Stanley (MWD) index for the Tokyo Stock Exchange, gives investors a piece of a large basket of Japanese securities. An exchange-traded fund (ETF) whose shares are quoted much like stocks on the American Stock Exchange, the fund trades above $10 a share, up from about $7 a year ago. ETFs are "a good way for individual investors to get exposure to international markets," says ING Investments (ING) portfolio manager Philip A. Schwartz.
Japan's surge has taken lots of investors by surprise. If the economy keeps perking along as strongly as expected, more and more investors will want to buy in.
By Joseph Weber