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. Last Updated: 07/27/2016

Japan Market Upturn Augurs Well

LOS ANGELES -- If the Japanese economy is accelerating again -- at long last -- does that make the Japanese stock market a screaming buy?


Last week's report that Japan's gross domestic product shot up at a 12.7 percent annualized rate in the first quarter, sharply above expectations, was almost overshadowed by the still-unfolding Sumitomo Corp. copper-trading scandal.


But over time, the Sumitomo debacle will amount to a mere blip. If Japan's economy finally is emerging from its virtual depression of the past few years, the implications for Japan's financial markets, and for the world economy, obviously are huge.


An economic recovery should bring a sustained rebound in Japanese corporate earnings, underpinning stock prices.


But recovery also could mean a sharp rise in Japanese interest rates, which have been held to the lowest levels in the world in recent years as the Bank of Japan sought to avert an economic meltdown after the collapse of the country's real estate and stock values.


Perhaps most important, a turnaround in the Japanese economy should begin to restore the shattered confidence of the country's consumers and investors. The latter remain incredibly suspicious about stocks, and for good reason: Japan's Nikkei-225 stock index, at 22,332.40 on Tuesday, still is down 43 percent from its peak of nearly 39,000 in 1989.


One U.S.-based bull on Japanese stocks is Bill Wilby, manager of the $3 billion Oppenheimer Global stock mutual fund in New York. He has 14 percent of the fund's assets in Japanese issues, including such names as electronic games company Nintendo, entertainment giant Sony and convenience store chain Family Mart.


Wilby expects that the combination of corporate cutbacks and the depreciation of the yen over the past year will mean earnings gains of 50 percent to 100 percent for many Japanese companies in 1996.


Jamie Rosenwald, whose Rosenwald Capital Management in Redondo Beach, California, manages about $400 million, owns stock in such export-oriented companies as Sony, copier company Canon and conglomerate Matsushita Electric, and expects them to continue to do "very, very nicely" if the economy accelerates and the yen remains weak.


From U.S. investors' point of view, the yen's trend is key. The yen's devaluation from 80 to the dollar a year ago to nearly 108 currently has helped restore some lost competitiveness to Japanese exporters.


But that devaluation also has depressed U.S. investors' returns in the Japanese market, because capital gains there buy fewer dollars when repatriated here.


Hence, while the Nikkei is up 12.4 percent this year, most U.S.-based mutual funds that exclusively buy Japanese stocks are up less than 4 percent, after rising 9 percent, on average, in the third quarter of 1995 and 4 percent in the fourth quarter.


Even funds that try to hedge their currency exposure haven't been able to protect themselves entirely this year.


Rosenwald says the best scenario going forward is for the yen to continue depreciating versus the dollar, but slowly -- so that the boost for Japanese exporters' stocks more than offsets the devaluation penalty for U.S. owners of the stocks.