Japan offers opportunities for stock pickers

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By Lisa Twaronite, MarketWatch

TOKYO (MarketWatch) -- On days like Friday, when Japanese stocks are pointed up, it's easy to forget the country's challenging demographics for stock pickers -- but it's also important to not let those demographics steer you away from select domestic issues, some analysts say.

"In a deflationary environment with biting demographics and policymaker passivity, seeking great domestic stock ideas in Japan is like plucking fruit from the tree on the left," said Macquarie Securities analysts Shih-Han Huang and Peter Eadon-Clarke in a recent report -- illustrated with an image of a snow-covered, bare-branched tree.

The country is plagued by deflation, a strong currency, fiscal and monetary policy paralysis and the highest government debt-to-gross-domestic-product ratio in the developed world.

In such an environment, "good value in domestic Japan can quickly become value traps," they caution. "It is essential to identify aggressive, proactive management. Such managements, almost inevitably, will have put in place an overseas growth strategy by now."

They cited research by Macquarie analyst Jun Shinkawa, who recommends housing fixtures maker JS Group Corp. (JP:5938 1,785, -17.00, -0.94%) /quotes/comstock/11i!jsgcf (JSGCF 0.00, 0.00, 0.00%) as an outperform.

The company's new growth drivers include increased market share by acquiring competitors, with its market share in the metal building material business to rise to 54% from 40.6%.

It also seeks to expand its sales in the Asia market, "and the acquisition of American Standard's Asian operations is a major help here," the Macquarie report said.

Moreover, the Japanese government is embarking on a new eco-point program, and JS Group is poised to benefit.

"A consumer who builds an energy-efficient house or purchases well-insulated sashes, window glasses and exterior walls when renovating their existing home will receive points and can exchange them for various merchandise or additional renovation costs such as a kitchen and bathroom," the Macquarie report said.

Regional banks

The Macquarie analysts also recommend not overlooking the "grey world of Japan's regional banking industry," although "making money from investing in Japan's financial services sectors has been challenging."

In regional banks, Macquarie bank analyst Ismael Pili's top pick is Bank Of Yokohama Ltd. (JP:8332 406.00, -2.00, -0.49%) /quotes/comstock/11i!byokf (BYOKF 4.82, 0.00, 0.00%) .

"This is a well-operated bank with relatively high margins, the highest non-interest income share, and good cost efficiency. The bank has one of the best rates of profitability among the regional banks," the analysts said.

While a jump in non-performing loans and provisions last year "raised concerns," Ismael believes such provisions have peaked and he expects bad loans to trend down from current levels.

On Friday, shares of JS Group were down 0.1%, and Bank Of Yokohama was up 0.7%. They both lagged a 1.9% increase in the benchmark Nikkei 225 Average, and a 1.2% rise in the broader Topix 1000 index.

Outside of Japan, other Asian markets were also higher, with South Korea's Kospi rising 0.7%, and Australia's S&P/ASX 200 climbing 0.3%.

Hong Kong's Hang Seng Index was up 0.9%, and the Shanghai Composite rose by 0.1%.

Lisa Twaronite is MarketWatch's Tokyo bureau chief.