A Silver Lining as Yen Overshadows Japan's Stocks

By AYAI TOMISAWA

TOKYO—With the yen at 15-year highs, these are gloomy times for the export-driven Japanese economy. But the rising yen has benefitted some shares: defensive issues that can withstand—or even thrive under—a strong currency.

For many big-name exporters, such as Toyota Motor Corp., Panasonic Corp. and Toshiba Corp., the fall in the dollar to below 85 yen has sent share prices to their lowest levels of the year. Still, certain small-capitalization stocks have been quietly outshining the market, though strategists and fund managers in Japan say they can be tough to find.

"The defensive stocks are mostly small market cap companies, but as long as the yen stays high, investors will continue showing interest," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

The key is to look for companies that are either immune to the harsh global environment, such as big utilities, or those that can take advantage of increasingly lower import costs to meet the needs of consumers seeking relief from an economy mired in deflation.

One such business is the restaurant chain Saizeriya Co., which offers salads for less than 300 yen ($3.57) and spaghetti and pizza for 400 yen, a far cry from the traditional high-end Japanese restaurant providing 20,000 yen gourmet meals to well-heeled corporate executives.

Saizeriya imports garlic and red chili peppers from China, pasta and wine from Europe and hamburger meat from its own facility in Australia. With these costs falling, it can continue to cut prices to attract price-conscious families.

While the benchmark Nikkei Stock Average has fallen 15% this year, Saizeriya's stock price has risen 6%.

Furniture retailer Nitori Co. operates 217 stores nationwide and imports 80% of its products, ranging from wardrobe drawers to beds, plates and photo frames, from countries such as China and Vietnam. The company, which also sells items such as floral-printed curtains, flatware, easy-to-assemble beds and kitchen units, attracts a wide range of customers including newlywed couples and students who hope to furnish their homes with affordable goods.

Nitori is forecasting that net profit for the year ending in February 2011 will rise 21% to 28.8 billion yen, with sales of 315.80 billion yen. It estimates that every one-yen drop in the dollar adds 900 million yen to profits. Nitori's stock has risen 3.9% this year.

Meanwhile, electric-power companies have proven attractive, not only for their stable dividends, backed by secure income streams, but also because demand for power has risen. This August was Japan's hottest since 1946.

"Under this volatile stock market, utility shares' performances will not likely disappoint us due to their stable cash flows," said Takeo Kusajima, senior fund manager at Chuo Mitsui Asset Management.

Another bright spot is shares offering high dividend yields despite Japan's low interest rates. Ten-year government bonds yield about 1%.

Companies offering high dividend yields in the pharmaceutical sector include Takeda Pharmaceutical Co., at 4.66%, and Astellas Pharma Inc., at 4.22%. These compare with an average of 2.3% for companies on the first section of the Tokyo Stock Exchange, according to data from Nomura Securities.

Another factor behind demand for defensive domestic issues is the lack of good investment targets overseas.

"In general, people are turning bearish about the global equity market. Portfolio managers want to turn to more defensive names. That's why these high-dividend-yield names have become attractive," said Mattia Ciancaleoni, a director in equity sales at Citigroup Global Markets.

Write to Ayai Tomisawa at ayai.tomisawa@dowjones.com