Should America's economy and stock prices stabilize, though, pressure on foreign investors to sell their Japanese shares will diminish, said Kathy Matsui, a Goldman, Sachs strategist. In that event, the Topix index, a collection of all first-section shares on the Tokyo Stock Exchange, could hit 1,100 by year's end, about 15 percent above current levels, she said.
Even if the outlook remains in flux, analysts say there are well-managed companies whose stocks are trading below 20 times this year's earnings, a low benchmark in Japan. For example, Toyota Motor, the world's third-largest automaker, is trading at 16 times earnings even though it recently raised its global sales target for 2002 by 3.8 percent and said it would expand production by nearly 8 percent at home.
Two other well-run carmakers, Honda Motor and Nissan Motor, are trading at just 10 times their earnings despite record profits and updated models -- the Accord for Honda and the Z for Nissan -- that are expected to sell well.
While technology shares have fallen out of favor with many investors, Goldman recommends looking at Canon, Japan's largest maker of office equipment, which is getting a lift from strongdemand for its digital cameras. Sharp and Fuji Photo Film are two other leaders in the production of digital cameras and LCDs. Like Japan's three largest car companies, Canon and Fuji also list American depository receipts in New York, so US investors can buy them in dollars.
Another company with American depository receipts that consistently reports record profits is the Kao Corp, Japan's largest maker of household goods. The country's largest drug maker, Takeda Chemical Industries, and Shionogi & Co, which has a cholesterol-lowering drug called Crestor, have good long-term prospects as well.
Not just individual stocks, but the market over all is cheap compared with 1994 and 1999, just before two other rallies. Companies listed on the Topix are trading at 22 times their forecasted earnings for this fiscal year. That is just a third the level of 1994 and half what they traded at three years ago. The lower valuation ``is not quite the same as claiming that it is cheap, but at least it is not as expensive as before,'' said Richard Jerram, an economist at ING Barings in Tokyo.
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