Japan: Looking Like a Good Bet Again

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China and India are booming, but investors shouldn't overlook Japan. After years of stagnation, the country's gross domestic product is expanding at an annual rate of 5%, roughly twice the U.S. growth rate, and corporate earnings are climbing a healthy 10%. “The outlook for Japanese stocks is bright,” says David Ishibashi, portfolio manager of Matthews Japan Fund.

 

Shares of exporters are attractive, says Ishibashi. Japan's export giants, always formidable, are shifting their focus. Instead of heading for the United States, most Japanese exports now go to Asia. With China buying goods of all kinds, Japanese exports to Asia are exploding at a 15% annual rate.

 

A solid winner is Nintendo, the video game powerhouse. Young people around the globe are lined up to buy Nintendo's Wii console, which makes it possible to play realistic versions of golf and tennis. “Nintendo is outselling its game competitors, including Sony,” says Dan Lefkovitz, a Morn-ingstar analyst.

 

Another impressive exporter is Toyota Motor. The auto giant already controls 40% of the Japanese market; it continues to make big gains here and in emerging countries. In the United States, the company has captured 15% of the market, double what it was a decade ago. And Toyota is poised to gain another percentage point of U.S. market share annually for the next several years. The company is likely to produce double-digit earnings gains this year, says Ishibashi. The car maker has a strong balance sheet and enough cash to raise its dividend smartly.

 

Ishibashi is also keen on financial firms and other companies that depend on the strength of Japan's domestic economy. Japanese consumers have traditionally put most of their money into savings accounts, which currently yield a miserly 0.21%.

 

Now that the economy is improving, more consumers are moving their money into mutual funds and other stock vehicles. That is good news for money managers, says Ishibashi. He recommends Sumitomo Trust and Banking Co., which oversees portfolios for wealthy families. Sumitomo also offers mutual funds for middle-income households. Assets under management are growing rapidly as the Japanese regain their appetite for stocks.

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