I used to have this game, and had the same problem. If I remember correctly, I think the periscope connects to a slightly complicated armature that drags a switch across a bakelite board. The bakelite board has the contacts that correspond to the torpedo target position. What happened on my game was the thumb screws that hold the armature together would become loose, causing the contact switch to drag across the bakelite plate contacts in a wonky way, messing up the targeting.

That targeting board is at the top of the game cabinet. Once you can see it, you can turn the periscope handle one way or another, and see how the switch drags across the bakelite plate. See if it corresponds to the movement of the periscope.