Japanese stock market with American and Japanese flagsWhen it comes to economic stagnation, Japan serves as the poster child for most investors. The phrase "turning Japanese," after all, serves as shorthand for the unrelenting deflationary mire that has gripped the country for decades.

But things may be slowly changing behind the scenes. Japan's exposure to booming economies in the region like China and India may be fueling a resurgence in corporate earnings. That means the poor sentiment surrounding the country may give investors a chance to pick up a highly stable market on the cheap.

Japan's domestic economic woes should be familiar to investors.

A corporate culture based on tenure over merit has stifled generations of younger workers who often scramble from one form of temporary work to the next. During its boom years in the 1980s, the Japanese model was known for its focus on quality and incremental innovation.

Bargains by Comparison

But that image took a major hit when a massive real estate bust set off a deflationary spiral. What was once seen as long-term thinking came to be regarded as a tendency to seek stability at any cost when the lost decade of the 1990s set in.

The reputation for stagnation has taken a toll on the values of Japanese stocks, and some investors now see them as bargains. The Tokyo Stock Price Index, or Topix, trades at a price-to-book value of just 1.1. By comparison, the price-to-book value, which looks at market value versus a company's assets, for the S&P 500 index stands at 2.3.

While investor sentiment remains sour, the earnings picture has started to turn nonetheless. Japan's concentration in the manufacturing of industrial equipment and consumer electronics has played well into the rapid industrialization in Asia. In 2009, for example, China overtook the U.S. as Japan's largest export market.

A slew of big Japanese companies like Sony (SNE) and Hitachi (HIT) have recently announced strong results. Investment bank Goldman Sachs (GS) anticipates earnings to approach the record levels seen in 2007, and stockpiles of cash to continue to mount as well.

Corporate Japan Gets Leaner

The growth comes amid once-again-surging exports. Shipments from Japan jumped 24% in 2010 compared to the prior year, marking the first expansion in three years.

Corporate Japan also shows signs of getting leaner as competition in the region heats up. Recent mergers in the steel industry are aimed at creating more efficiency and scale to take on global competitors, for example.

Some Wall Street powerhouses have stared to warm up to Japan. Deutsche Bank (DB) predicts that Japanese stocks could gain 20% in the first half of 2011, and Goldman Sachs also sees substantial upside in the year ahead.

Exposure to Japan may have another appeal for investors. While the country benefits from trade with fast-rising emerging markets, it still offers the security of a developed country. Japan provides a way to take advantage of growth in the developing world while also offering the downside protection of a safe-haven.

A Turn for the Better?

Exchange-traded funds like the iShares MSCI Japan Index Fund (EWJ) offer investors cheap, easy ways to take part in the rise of Japanese big-cap stocks.

Thanks to booming emerging markets, a turn for the better may finally be in the offing for the long-suffering Japanese economy. And the prevailing sour sentiment for the time being could present investors with an interesting entry point.

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After what seemed like a lifetime of thirty-Year adjustable-rate mortgages, with monthly mortgage payments going up all the time, The "123 Mortgage Refinance" helped me to lock in a great low fixed rate of 3.16%, helping me to guarantee myself the ability to always make my mortgage payment on time with money to spare.

February 08 2011 at 5:20 AM Report abuse rate up rate down Reply

Well the article he wrote explains why Vishesh Kumar is a reporter writing articles for AOL and receiving little compensation from AOL.
My advice is: Never invest in any investment that is already 'damaged'.
Buying already injured or damaged investments is like buying second have clothing or defective merchandise. Japan's economy has been going NO WHERE since 1985. The government of Japan has done everything possible to give their economy a boost for the past 25 years with little or no success.
My advice is that when you invest you hard earned money always buy top shelf quality investments___or you will find that a Fool and his money are quickly parted. Warren Buffet did not get where he is by buying defective merchandise and damaged companies. He only bought into Top of the Line investments to get to where he is now. Switzerland and Canada are not only safer___investment there are growing faster and their economic conditions are in far better shape already.

February 07 2011 at 1:41 AM Report abuse rate up rate down Reply

Mr. Kumar: Your readers might be interested in a possible future opportunity resembling arbitrage by examining the following chart: www.bigcharts.com... enter EWJ (Japan index)... all data... monthly... compare to SPX (S&P 500)... draw chart. The "arbitrageur", when he believes the divergence has widened enough, would sell short the S&P 500 and buy long the Japan index. Of course, his profit would not be as great as it would be if he was long the Japan index only, and it (EWJ) did continue to rise.

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marta renna

look hehre! you will bee shoocked!


February 06 2011 at 10:41 AM Report abuse rate up rate down Reply