Japan has been all over the news lately -- most notably when President Obama referred to the country in his sales pitch for the stimulus package. He wanted the United States to avoid the plight of Japan in the 1990s, which is known as "the lost decade." In the 90s, Japan grew very little, the economy was trapped in a deflationary spiral, and only Japanese exporters did well.

The Japanese stock market, as measured by the Nikkei, topped out in December 1989 at just under 39,000; it's currently trading near 7,200. This is a more than 80% decline in just under 20 years. Imagine how you'd feel if you had invested in a Japanese index fund back in the glory days!

In my opinion, at these levels, the majority of bad news has been discounted by the Japanese market. Stocks have declined precipitously in the past year, and it makes sense to do some fishing at present levels.

The lay of the land
Investors can buy shares of a wide variety of Japanese companies that trade on U.S. exchanges. You'll find everything from technology and heavy industrial manufacturing companies to businesses selling home and leisure goods. In my opinion, however, five companies stand out as the best opportunities in the Japanese market right now:



Mitsubishi UFJ Financial (NYSE:MTU)

Financial - Foreign Money Center Banks

Mizuho Financial

Financial - Foreign Money Center Banks

Nissan Motor (NASDAQ:NSANY)

Automobiles & Parts


Financial - Investment Brokerage


Financial - Credit Services

Source: Yahoo! Finance.

Why Japanese banks?
I've previously written about the effects of deflation. Deflation is disastrous for the banking system, because it causes losses to accumulate over time as asset prices decline while debts stay constant.

In 2006 I wrote (in another forum) about how I expected to see the share prices of Citigroup (NYSE:C) and Mitsubishi UFJ Financial Group cross. I believed Citigroup would decline due to the expected deflationary effects of the housing bust, while Mitsubishi UFJ would rise.

At the time, Citigroup was trading in the $40s; Mitsubishi UFJ was in the low $10s. While I was right on the crossing part, I was completely off on the rally in Mitsubishi UFJ's shares. Citigroup has now declined below $2, while the shares of Mitsubishi UFJ are fetching $4.50. Never underestimate the ability of the stock market to overshoot -- in both directions.

While some may be tempted to bottom-fish with Citigroup right here, I would be a lot more comfortable doing the same with Mitsubishi UFJ. U.S. banks have been dealing with this deflationary problem -- most evident in housing -- for just a couple of years, while Japanese banks have almost two decades of experience.

Mitsubishi UFJ is the largest Japanese bank by assets -- roughly $2 trillion -- and as a result is a direct beneficiary of any macroeconomic stabilization in Japan. Japan was the first to get into a deflationary cycle in the 1990s, and I believe it is a safe bet that Japan will be the first to get out. The bank trades at a discount to book value and is still profitable, trading at 9 times forward earnings (of course, assuming you can believe those earnings estimates). And it has thus far not reported horrific CDO-related losses like Citigroup.

From banks to brokers
A much riskier Japanese financial firm is Nomura. This is the largest Japanese stand-alone broker, which recently acquired Lehman Brothers' assets in Asia. Nomura just reported its worst quarter since it started issuing quarterly reports back in 2001. The issue is that broker-dealers are very leveraged to stock and credit market performance.

Hovering near $5, the shares look interesting -- although they're still speculative. The stock trades at an even deeper discount to book value than Mitsubishi, and if the markets recover at some point in 2009 or 2010, Nomura can easily trade at a premium to book value, provided losses remain manageable in 2009.

Autos with staying power
For years, Japanese car companies have been taking away market share by raising quality and giving consumers more bang for their buck. Of the major three -- Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan -- Nissan has declined the most in the past year. Nissan is run by a non-Japanese executive, Carlos Ghosn -- who also runs Renault of France (Renault is a controlling shareholder of Nissan).

Nissan's shares currently trade well below where they did when Ghosn took over as CEO in 2001, even though the company is in much better shape. Yes, car sales in the United States have declined from an annual rate of 9.6 million in January, while the average rate for the decade is closer to 16 million vehicles. Instead of bottom-fishing with lost causes like General Motors (NYSE:GM) or Ford (NYSE:F), I think you'd be better served kicking the tires on Nissan.

Not all Fools agree on Japan -- just see the links below for contrary views -- but I believe it's a market worth serious investigation.

More on Japan:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. Nissan is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.