Did you know Tokyo’s economic output is the largest for any metropolitan area in the world? It’s true. The greater Tokyo area, with over 35 million residents, is not just the most populous city in the world, but the most profitable.
Wrap your head around this: The GDP of Tokyo was estimated to be almost $1.9 trillion annually in U.S. currency, according to the government of Japan. And the entire world’s GDP was estimated to be about $74.5 trillion in 2010, according to the CIA’s World Factbook. That means roughly 2.5% of the entire world’s economy is located in this single Japanese city.
When you consider the scale of Tokyo’s economy alone — not to mention the collective might of all Japanese businesses — it’s no wonder that the recent chaos in the Land of the Rising Sun has created a major disruption in the global economy.
Yes, there are serious issues with Japan’s long-term economic might. China just bumped it from the No. 2 spot in the world economic pecking order a few months ago, and an old population is only going to get older. The Nikkei has been in a slow slide since the 1990s, and there’s good reason Japan is typically left off the list of hot Asian investment markets.
But in the near term, the pessimism over Japan may be overdone. The nation still has a vibrant economy, and as it rebuilds in the wake of the recent disasters there are sure to be growth opportunities for savvy investors.
As Japan recovers, so might your portfolio. Here are some ways to share in that recovery:
Mizuho Financial
If you really want to take the tiger by the tail, jump into Mizuho Financial Group (NYSE:MFG). The company was brutalized by the financial crisis (as were many banks worldwide) and just when it thought it was getting things in order, the earthquake and tsunami struck. In the aftermath, Mizuho’s computer system failed — leaving it unable to process salary payments for more than half a million people.
Not surprisingly, the company’s ADR shares are off almost 80% from their pre-recession peak and 15% this year. However, the stock was at a new 52-week high in March before the mayhem hit Japan — hinting that Mizuho had a number of things going for it.
Personally, I am very bullish on banks in general — despite the obvious problems plaguing the sector in the wake of the sub-prime crisis and economic slowdown. (Read a full analysis on why I think the financial sector is full of bargains like BAC.) That’s partially because I believe the economy will eventually gather momentum over the next 12 to 18 months and financials naturally heat up in turn. As Japan recovers, Mizuho stock should not just climb back to where it was — over 20% above current valuations — but see continued growth.
Obviously, any financial stock is an aggressive buy right now and Mizuho is no exception. But there is reason for optimism. The bank’s new leadership gave a surprisingly blunt assessment of the bank’s recent problems last week. It admitted that a bloated management structure had been in place and that the computer crisis after the quake helped shine a light on areas that need improvement.
Mizuho is stable, with steady cash flows fueling a 4.2% dividend yield and seven-straight profitable quarters since the financial crisis. Traders may find MFG a risk worth taking as Japan’s economy bounces back.
Hitachi
Yes, Hitachi (NYSE: HIT) produced the reactors at the Fukushima nuclear power plant via its joint venture with General Electric (NYSE:GE) and shares took a nose dive as a result — a nearly 25% drop in a matter of weeks back in March. But Hitachi does so much more nuclear power. It makes ATMs, works on IT infrastructure and produces construction equipment, among many other things. It’s even getting into cloud computing. This diversification helps keep Hitachi stable, and allows it to tap into various revenue streams when opportunities arise.
Before the Japan crisis, Hitachi had soared 50% in five months to a new 52-week high on reports that 2011 would be a soundly profitable year. A dramatic turnaround from a loss of $3.15 a share last year and a gut-wrenching $23.85 loss in 2009 has put this stock back on track, and the recent turmoil in Japan can’t beat down this impressive growth arc.
Hitachi has already bounced back 20% from its lows and is approaching its pre-crisis highs. Shares could still have some significant upside left as Japan gets its economy back on track.
Toyota
Automaker Toyota (NYSE:TM) has had a rough go of things in the last year or two. Bad press around big recalls, slowing consumer spending and the Japanese crisis this spring really weighed on the company.
Or did it? Despite recalls and weak spending, Toyota remained the worldwide leader in auto sales last year, moving 8.4 vehicles in 2010. And while the headlines may have made it sound like Toyota had a brutal May with a -38% drop in North American sales, consider that the story was the same for other automakers, as well. General Motors (NYSE: GM) saw sales slump -30%. On the plus side, Toyota’s May sales were up 21% from April.
In short, the automaker is resilient and remains an industry leader. It is very profitable and has a nearly bulletproof brand.
What’s more, if pre-crisis pricing holds true, Toyota has about 15% to 20% upside. Like Hitachi, shares were cruising at a 52-week high in March and have yet to regain those lofty levels.
Nippon Telegraph and Telephone
If you’re looking for a lower-risk way to play the Japan recovery, Nippon Telegraph and Telephone (NYSE: NTT) would be it. The telecom powerhouse does over $100 billion in revenue annually, and boasts a 3% dividend yield. Find out how to reduce the risk in your dividend portfolio on InvestorPlace.com.
The company is pretty sleepy, with revenues growing slowly but steadily over the last several years. But as with domestic telecoms Verizon (NYSE:VZ) and AT&T (NYSE:T), investors don’t get into Nippon for breakneck growth — they buy in for stability.
Despite the crazy year Japan has endured, NTT stock has traded in a very tight range of about $22 to $25 in 2011. As with our last two picks, Nippon was at a 52-week high before the earthquake, tsunami and nuclear disaster — and right now shares are still about 10% off that peak, despite climbing back recently.
Nippon seems very sound fundamentally, and its low-risk and cash-rich business gives investors a way to stay safe as they invest in Japan’s recovery. In May, Nippon released its complete fiscal year 2010 results. It included a nearly 9% jump in operating income and expanding margins, along with a plan to repurchase $3.5 billion in stock — over 4.5% of outstanding shares. That will certainly ensure strong earnings performances in the future, and increase shareholder value in 2011.
As of this writing, Jeff Reeves did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
