Bullish Outlook Still Prevails for Japan Despite Bearish Monthly Indicator

NEW YORK (TheStreet) -- Although core machinery orders are expected to fall by 1.4% in September after a strong gain in August, analysts are still positive about the economic recovery in Japan due to improving company profits and sentiment.

Despite the predicted monthly decline, analysts expect core orders to be up for the second consecutive quarter. In a statement from Dai-ichi Life Research Institute regarding its polling of 24 analysts, it was noted, "The core orders probably fell in September as reaction to a big gain in the previous month, but they remain in a rising trend. Machinery orders, a leading indicator of capital spending, is expected to move in an uptrend due to improvement in corporate and sentiment."

Should that transpire, it would be another sign that the reflationary policies of Prime Minister Shinzo Abe of boosting demand and exports with quantitative easing measures that have weakened the yen are working. Japan's economic growth has outpaced that for other G7 nations this year.

Another sign of increasing demand in Japan is a recent business poll is that wholesale prices are expected to have increased 2.5% in October from a year earlier, accelerating from a 2.3% rise in the previous month.

A bullish outlook on the island nation was the foundation for a speech in late October at "The Invest for Kids" conference in Chicago by Dinakar Singh, founder of TBG, a hedge fund with $6 billion in assets under management. Of the 30 positions held by TBG, six are Japanese stocks, Singh stated. In his remarks, he was particularly bullish about Hitachi (HTHIY).

Singh was positive on Hitachi as he contends the market is characterizing the stock wrong as a consumer electronics firm. According to Singh, Hitachi is now an industrial equipment company, much like Emerson Electric (EMR) and Phillips (PHG). Hitachi should be trading at the price-to-earnings ratios of Emerson Electric (32) or Phillips (41), rather than far below the market average of around 20 at less than 15, currently.

He is also bullish on the new management of Hitachi, which is much more shareholder friendly. Now trading around $69 a share, the mean analyst target price for Hitachi is $79.50. The mean analyst recommendation is a "1," which is a strong buy.

Strong has also been the performance of iShares MSCI Japan Index (EWJ), the main exchange-traded fund for the economy, and Toyota Motor (TM), a useful tracking stock and indicator for the export community of the country.

Over the last year of trading, iShares MSCI Japan Index is up more than 30%. That certainly reflects the improving economic outlook for the country after more the prolonged period of "The Lost Decade." At around $11.70, it is close to its 52-week high of $12.38, although there has been a dip in recent market action.

For the same period, the stock price of Toyota has soared almost 60%.

A weaker yen makes its motor vehicles much more price competitive in export markets. On a quarterly and yearly basis, earnings-per-share for Toyota have surged in the triple digits, as a result.While that is clearly unsustainable for the long term, the mean analyst projection is that Toyota will have earnings-per-share growth averaging 32.50% for the next five years.

By contrast, it is expected to be 14.77% for Ford Motor (F) and 16.87% for General Motors (GM).

As with so many other nations, Japan's economy will improve more when growth in China, its largest trading partner, accelerates.The present stimulus policies of Prime Minister Shinzo Abe have been beneficial for the short term, but currency manipulation is hardly the prescription for long term economic growth.

Business investment and sentiment will have to continue improving if The Lost Decade for Japan is to finally end after more than 20 years.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University. He does not have a position in any of the securities mentioned in this article.

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