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) -- At a time when markets around the globe have been soaring, Japan remains mired in a slump. Japan funds have lost an annual average of 3.1% in the past five years, the only foreign category that has declined, according to fund-research firm Morningstar.

Plenty of analysts think the lackluster performance will continue. But some value-seeking fund managers have been bargain shopping. Funds that are overweighting Japan include

First Eagle Global

(SGENX) - Get First Eagle Global Fund A Report


Tocqueville International Value

(TIVFX) - Get American Beacon Tocqueville IntlVal Report


BlackRock Global Allocation

(MDLOX) - Get BlackRock Global Allocation A Report

. "Buying stocks in Japan is like shopping at


(WMT) - Get Walmart Inc. Report

," says Abhay Deshpande, portfolio manager of First Eagle Global, which has 30% of its assets in Japanese stocks. "Everything is cheap, and even the brand-name stuff is on sale."

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To be sure, the outlook for Japan's economy remains bleak. Spending heavily on projects that could stimulate the economy, the government racked up big deficits in recent years. But all the expenditures failed to ignite an economic boom. Many economists now believe gross domestic product will languish, growing perhaps 1% annually for the next five years.

Part of the problem can be traced to demographics. In a country with little immigration and small family sizes, the population is aging. The country is saddled with the need to support a growing group of retirees. Forecasters say the population will begin shrinking, which could lead to lower demand for consumer products of all kinds.

But not all companies seem destined to stagnate, fund managers say. While businesses that serve the domestic-consumer economy are struggling, Japan remains home to world-class industrial exporters. Those businesses have been achieving healthy sales by exporting to China and other emerging markets. "Most of my Japanese holdings right now are exporters," says William Kennedy, portfolio manager of

Fidelity International Discovery

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, which has 18% of assets in Japan. "Japanese companies are supplying the high-tech machinery and the equipment that is necessary for the boom in China."

Another fund that favors exporters is BlackRock Global Allocation. A big holding is



, a maker of agricultural equipment. While sales of tractors to the U.S. have been slowing, exports of rice-planting equipment are growing in China, Thailand and Vietnam. "Kubota is benefitting from the mechanization of the agricultural industries in emerging Asia," says Ben Moyer, an analyst for the BlackRock fund.

James Hunt, a portfolio manager at Tocqueville International Value, says some top Japanese exporters sell at big discounts to their fair values. A favorite holding is tire maker



. The shares have become undervalued as investors worry about the slowdown in global auto sales. Hunt argues that the company remains dominant, and it should enjoy increasing demand for giant tires that are used for construction and mining.

He also likes



, a maker of robotic equipment used in manufacturing.

For a pure play on the country, consider

T. Rowe Price Japan

(PRJPX) - Get T. Rowe Price Japan Fund Report

. Portfolio manager Campbell Gunn favors companies with sustainable growth that sell at moderate prices. He says such growth stocks have fared best in the difficult Japanese markets of recent years. A steady holding is



, a maker of diapers. The recession has done little damage to the company, as demand for disposable diapers has been climbing in Asia.

Gunn argues that Japanese stocks are worth holding because they can diversify a portfolio. "Japanese stocks sometimes do the opposite of what other markets are doing," he says.

Tokyo's markets tend to outperform in unpredictable streaks, Gunn says. In 1999, the average Japan fund returned 110%, topping the

S&P 500 Index

by 89 percentage points. The funds surpassed the S&P in 2005 by 28 percentage points. Last year, Japan funds outperformed by 2 percentage points.

Some managers argue that Japan is poised to begin a period of outperformance. By measures such as price-to-book value, Japanese stocks are cheap compared with markets around the world. In addition, the country now has plenty of cash on the sidelines that could move into stock markets. Japanese consumers currently have around 70% of their assets, or $13 trillion, in low-yielding savings accounts, says Neil Hennessy, chief executive of Hennessy Advisors, which manages

SPARX Japan Investor Fund


Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.