One example is Itochu (ITOCY, news). A conglomerate, Itochu gets a very big part of its revenue by selling metals and raw materials in high-growth countries like China. For raw materials, Itochu has similar costs as BHP Billiton (BHP, news), because it is a joint venture partner with that mining company. But it has a dramatically lower valuation, points out Ned Gray of the Delaware International Value Equity Fund (DEGIX), which owns Itochu. Besides selling raw materials to China, Itochu sells packaged food, textiles, chemicals and industrial components there. In short, it is a China play, but on the cheap.
Note that Itochu, like several of the stocks in this column, trades as a pink sheet stock in the U.S., not trading on a major exchange. While I normally advise extreme caution with such stocks, these are all well-established Japanese companies, so the normal concerns do not apply. This one is thinly traded, however, so buying enough shares to establish a position -- and selling down the road -- may require patience.
Reason No. 2: Thanks to China and the Fed, Japan should see respectable growth
After a rough patch in early 2011 as government incentives for consumer spending expire, Japan will move into a "self-sustaining recovery" by the end of 2011, predicts JPMorgan Chase Japan analyst Masamichi Adachi. The Bank of Japan forecasts growth of around 1.8% for 2011 and 2.1% for 2012.
This kind of growth could help stem the persistent deflation in Japan. That could send interest rates on long-term bonds higher, compared with short-term bonds. This steepening of the yield curve, as it is known, would be good for banks, because they typically make money by converting short-term borrowings into long-term loans. This will benefit Mitsubishi UFJ Financial Group (MTU, news), says Gray, who owns a big position in this bank in the Delaware International Value Equity fund.
Dailey, at TEAM Asset Strategy Fund, favors this bank because it's been beaten down like many banks around the globe in the aftermath of the credit mess. Yet it is much more financially sound than credit meltdown culprits like Citigroup (C, news)and Bank of America (BAC, news). "Investors are looking at Citigroup and Bank of America and saying how cheap they are," Dailey says. "With Mitsubishi, you can get a bank at a similar price, with none of the baggage."
Reason No. 3: Japanese companies are taking steps to shape up
One reason to like Japanese companies is that they have been forced to cut costs and become more efficient in recent years because a strong yen made it challenging for them to sell abroad, says Madelynn Matlock, portfolio manager of the Huntington International Equity Fund (HIEAX). And Kitano, at JPMorgan Chase, cites restructuring as the main factor that should "put Japan back on the map for global investors."
Gray, of the Delaware International Value Equity Fund, thinks these kinds of efficiency improvements will help the bottom line at a large holding of his, Asahi Glass (ASGLY, news), which sells glass used in autos, construction and LCD TVs.
Reason No. 4: The Chinese yuan will increase in value against the yen
A stronger Chinese currency will help Japanese exporters like Komatsu (KMTUY, news)because it sells construction and mining equipment into China, says Matlock, who has a position in this company at the Huntington International Equity Fund.
A stronger yuan will also put more buying power in the hands of China's rapidly growing middle class, now about 300 million strong. Many Chinese shoppers will travel to Japan to buy cameras, TVs and other consumer electronics, to make sure they aren't getting imitations of brand-name products at home, Hennessy says. The Japanese government has loosened restrictions on travel from China and opened new airports, which will encourage this kind of travel, Hennessy says.
Panasonic (PC, news), which sells home electronics and appliances, should benefit from this theme, Matlock says. The company's stock looks cheap, and it is leaner after several rounds of cost cutting. Matlock also likes Canon (CAJ, news), which sells digital cameras, printers and copiers. And her fund owns a position in Honda Motor (HMC, news), which is a play on this theme as well, because it sells cars in China. But as the Japanese economy continues to grow, more Japanese consumers will be driving around in new Hondas as well, which will also give this company a boost.
At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
