Does your stock portfolio have enough exposure to Japan?

When's the last time you heard that question? Your answer is probably measured in decades.

The Japanese stock market, as measured by the Nikkei 225 index ($JP:N225), hit an all-time high -- intraday -- on Dec. 29, 1989, at 38,957.44. The subsequent low after the bursting of the Japanese asset bubble came on March 10, 2009, at 7,054.98. The percentage drop is stunning -- 82% -- but it's the duration that is mind-boggling. This bear market went on and on for more than 20 years.

But something unusual -- very unusual -- happened to Japanese stocks with the end of 2011.

In the aftermath of the March earthquake and tsunami, the Nikkei retreated to 8,605, its lowest level since 2009. Worries about the effects of the destruction on the Japanese economy and the fallout from the euro debt crisis pressured the index still lower, to a bottom on Nov. 25, 2011, at 8,160.

And then the index began moving up.

On March 27, the Nikkei 225 broke 10,000 yen, climbing to 10,255.15. That's still 74% below the 1989 high. But it's the direction that counts.

You're certainly entitled to ask how long the trend will point up. After all, Japan is a country with huge and widely recognized long-term problems of a massive budget deficit and an aging population. I don't want to pretend that those problems have been fixed or that they don't count in the long run. But in the short term -- a year or two -- I think there are sound reasons to think that the upward trend is sustainable.

Image: Jim Jubak

Jim Jubak

Let's count the whys, OK?

5 reasons Japan is rising

First, the damage from the earthquake and tsunami, the disruption to Japanese businesses from the flooding in Thailand and the pain inflicted on Japanese exporters as the euro debt crisis pushed up the value of the safe-haven Japanese yen all mean that Japan's economy began 2012 from a very low base. Things don't have to be great to be markedly better.

Second, in a world where developing economies as a whole have an economic-growth problem, Japan's projected growth rate of 2% for gross domestic product this year -- according to the Organisation for Economic Co-operation and Development -- looks very, very solid. That 2% growth is the same speed that's projected for the United States -- and an awful lot better than the recession projected for Europe.

Third, government spending on earthquake and tsunami reconstruction finally seems to have kicked in. So far, the Japanese government has appropriated $220 billion for building new homes and replacing streets and other infrastructure. The reconstruction effort has unleashed private spending to replace everything from cars to home furnishings.

Fourth, while I wouldn't exactly say the Bank of Japan has experienced a conversion to Keynesian stimulus spending, in February the bank adopted a 1% target for consumer price inflation. Considering that inflation in Japan is about as rare as the Japanese river otter (last confirmed sighting: 1979), a 1% target is amazingly aggressive. In January, year-to-year inflation was running at 0.212%. Wages rose 0.3% that month.

Fifth, Prime Minister Yoshihiko Noda has proposed raising the current 5% consumption tax in order to reduce the huge government budget deficit. It's unlikely that this legislation will pass, but even its introduction by the Noda government is a sign of real progress. This year, for the fourth year in a row, the government's budget relies more on money raised from new bond sales than it does on tax revenue.

Japanese companies worth a look

If investors are familiar with any Japanese stocks at all after a 20-year bear market, they recognize the names of Japanese exporters. With the yen weakening as the dangers of a euro debt crisis (temporarily) receded, shares of exporters have recovered from the beating they took in 2011 when company sales dropped as the yen soared, raising the costs of Japanese goods to customers paying in euros, dollars or yuan.

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Year-to-date returns for many Japanese exporters have easily beaten the 12.35% gain (as of March 28) for the U.S. Standard & Poor's 500 ($INX). Factory automation giant Fanuc (FANUY), for example is up 21.3% for 2012. Farm- and construction-equipment maker Kubota (KUB) is up 16.9%. Construction-equipment maker Komatsu (KMTUY) is up 21.3%. And Toyota Motor (TM) is up 29.5%.

Of course, those returns are relevant only if you have a time machine that lets you go back to Dec. 31 and buy the shares or a strong belief that the rest of 2012 will look like the beginning of the year. Here, the big issue is the value of the yen. If the euro debt crisis kicks up again -- with, say, the Greek and French elections in early May producing two new leaders in those countries who want to reopen past deals or, say, with a negative report from eurozone and International Monetary Fund inspectors on Greece in June, or, say, the need for a rescue package for Spain -- then the yen will rally, and Japanese exporters will get hit as hard as they were in 2011.

My picks among exporters would be Komatsu and Kubota, because both will be big beneficiaries of spending on earthquake and tsunami reconstruction.

Japanese exporters aren't just the more familiar names to U.S.-based investors; they're also easier to buy. Most -- including all of the above stocks -- trade as American depositary receipts in New York.

Despite the unfamiliarity, though, and any difficulty in buying the shares, I much prefer domestically oriented Japanese companies for the remainder of 2012. (Big online brokerage firms such as Fidelity, Schwab and E-Trade have all made it easier to trade in overseas markets. It's worth asking.) They'll reap the rewards of the relative outperformance of the Japanese economy -- compared with other developed economies -- without the downside exposure to an appreciating yen. In fact, in the case of companies that source their raw materials or products outside of Japan but sell inside the country, a rising yen is actually a boost to profit margins.

One of my favorite picks in this sector is JS Group (JSGRY) -- 5938.JP in Tokyo, and very thinly traded in New York. The building materials manufacturer owns 40% of the market for toilets in Japan and 50% of the market for window frames. The Tokyo-traded shares are up 21.7% so far this year.

Or try Rakuten (4755.JP in Tokyo; no U.S. listing), the owner of Rakuten Ichiba, the largest e-commerce site in Japan. The company is working in a joint venture with China's biggest search company, Baidu (BIDU), and has recently made e-commerce acquisitions in Brazil (now Rakuten Brazil), Germany (now Rakuten Deutschland) and the United Kingdom. In November 2011, Rakuten bought e-book publisher Kobo. The Tokyo shares are up just 2.4% in 2012.

And for a big dose of Japanese retailing, look at Seven & I (SVNDF). (The stock trades as 3382.JP in Tokyo; New York volume runs at about 50,000 shares a day, and Tokyo volume runs about 2 million shares a day.) This holding company, which is the parent of the 7-Eleven chain of convenience stores in Japan (and which completed its purchase of the U.S. 7-Eleven company in 2005), is the fifth-largest retailer in the world with 45,000 stores in 100 countries. Back in Japan -- the source of 70% of company revenues in 2011 -- it owns the Ito-Yokado grocery and clothing stores, Denny's Japan, and the Sogo and Seibu department store chains. Retail sales in Japan rose 1.9% in January after climbing 2.5% in December. The Tokyo shares are up 14.8% in 2012.

That's by no means the end of the Japanese companies that you can research as you build (or rebuild, after 20 years away) the Japanese weighting in your portfolio. But it should be enough to get you started. I'll be giving you more suggestions from Japan as the year goes along. I think this story will run deep into 2012, if not longer.

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Rakuten as of the end of December. Find a full list of the stocks in the fund as of the end of December here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

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Stock mentioned in this article: Toyota Motor (TM).