Talking Japan With Kahori Ando

The manager of the Sparx Japan Investor fund is bullish on this island nation.
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While U.S. stocks have spent the summer slumbering soundly, Japanese shares have been rampaging like Godzilla through the streets of Tokyo.

So is this a sign that the Japanese economy is finally turning?

One person who thinks so is Kahori Ando, portfolio manager for the $17 million

(SPXJX)

Sparx Japan Investor fund. Ando says low unemployment and strong private consumption -- not just political reforms -- have rejuvenated Japan's long-moribund domestic economy. Considering her fund's year-to-date return of 17.4%, 5 percentage points better than the MSCI EAFE Index, it's hard to argue with her.

TheStreet.com

checked in with Ando to see whether this rally is for real or just another piece of bad science fiction.

What's behind the huge rally in Japanese stocks over the past month? Is it all about the Japan Post election?

Japanese market participants are reacting favorably to the comments made by Japanese finance ministers that the economy is picking up. The market has already discounted the Japan Post bill rejection, so this is not entirely a political-based rally.

The focus of the market is on the recovery of the Japanese economy. The strong machine orders report released in early August, along with other favorable economic indicators, has outweighed the political risk.

Is this rally sustainable? Or is it just another false start like many other Japanese head fakes?

Private demand, which consists about 70% of Japan's GDP, will continue to be strong. In particular, private consumption and private nonresidential investment are the contributing factors, which are being supported by Japan's structural changes. Private consumption is supported by improvement in the unemployment rate and wage increases.

How is the yen strengthening going to affect this rally? Won't it cut into exports?

Japanese exporting companies are reportedly assuming 105 yen to the dollar for this fiscal year. That means they still have room to absorb additional yen appreciation from today's exchange rate of 110 per dollar. In terms of portfolio construction, we are focusing on domestic names rather than the exporting sector.

How will the huge discounts offered by U.S. automakers affect Japanese manufacturers like Honda (HMC) - Get Report and Toyota (TM) - Get Report?

Despite the large discounts offered by

General Motors

(GM) - Get Report

and

Ford

(F) - Get Report

, Japanese car sales in the U.S. have been growing and do not seem to be affected by U.S. automakers' discounts. We also believe those discounts won't be sustainable after the new models are introduced in September. Japan's auto industry is booming, with new capital investment and new model development for the first time in 15 years. We also expect the new models will boost Japanese auto sales.

Which sectors are growing the fastest? What are your favorite stocks?

Sumitomo Financial Group

is one of our largest holdings. The company completed restructuring its nonperforming loans, and profit margins have started to improve, reflecting the economic recovery. Other names we like include

Komatsu

, which is enjoying a strong foreign demand for its machines.

How is trade with China developing? Are relations between the two countries improving?

Japanese exports to China have traditionally been capital goods. The appreciation of the Chinese yuan will increase Chinese purchasing power. We expect Chinese demand for consumer goods to grow.

How are PM Koizumi's economic reforms proceeding?

Despite his bullish outlook on the nation's overall economy, the Bank of Japan governor recently indicated that there are risks going forward which could derail the reforms and the recovery. However, we anticipate no significant changes in the underlying trends of the structure of reforms. So we expect no significant market impact, at least in the near future.