After four decades trotting the globe in search of investing insights, Franklin Templeton’s Mark Mobius has built a reputation as the “Dean of Emerging Markets.”

Although Mobius oversees 18 different mutual funds, focusing on emerging markets like China, Indonesia and Thailand, his current favorite way to play emerging market economies is an unusual one: Japan.  

#-ad_banner-#The approach makes sense. The Japanese economy is on an upswing, thanks in large part to aggressive monetary stimulus. A weakening yen also helps, as exports rose 17% in the past 12 months. That’s a higher growth rate than many economists had expected just a few quarters ago. And the key boost is coming from emerging markets.

Take Kawasaki Heavy Industries Ltd. (OTC: KWHIY), a $9-billion industrial firm that produces heavy machinery. Shipbuilding and defense contracting are a pair of strengths for the company.

The firm projects annual revenue from emerging markets will more than double to $5.4 billion by 2020 from $2.5 billion in 2012. Annual revenue from all sources is currently just over $12 billion.

Lately, Kawasaki has seen especially strong orders for industrial robots in China, India and Southeast Asia, which use the robots mainly in auto manufacturing and other factory settings. Demand for industrial robot needs in these regions is expected to outpace global demand for at least five more years.

Hydraulic equipment, aircraft engines, railway systems and gas turbines are among other Kawasaki products that are expected to generate strong demand in emerging markets in coming years, analysts say.

Company management sees operating profits rising 16% in the current fiscal year to a record $829 million. Results were similarly strong in the prior fiscal year, when operating profits spiked 19%. Shares of Kawasaki Heavy are up more than 50% in the past two years.

Car and motorcycle maker Suzuki Motor Corp. (OTC: SZKMY) obtains about 40% of revenue from emerging markets, typically focusing on the middle classes of those countries with the fastest-growing populations such as India, China, Hungary and Pakistan. Management also smartly seeks local partners that know how to promote affordable compact cars (Suzuki’s main products) in their region.

Current expansion plans include a second manufacturing facility in the Southeast Asian nation of Myanmar. Upon completion in 2017, the facility is expected to produce about 10,000 cars annually.

Also, Suzuki just began offering a fourth-generation fuel-efficient compact car in Hungary, with estimated first-year production of 70,000 units. The motorcycle segment has produced solid growth in India, where motorcycles are gaining popularity with younger consumers.

Since fiscal 2012, Suzuki’s net margins have widened to 3.5% from around 2%, while net income more than doubled to $1.1 billion. The value of the firm’s American Depositary Receipts (ADRs) climbed more than 40% during the past two years.

Two other Japanese multinationals are also going on further emerging market success. Uni-Charm Corp. (OTC: UNICY) is a leading producer of sanitary goods and personal care products, while Daikin Industries Ltd. (OTC: DKILY) is the world’s largest air conditioner manufacturer.

Both firms generate well over half of sales from foreign sources, mostly emerging markets. Both delivered mid-to-high teens revenue growth the past few years.

Like Suzuki, Unicharm and Daikin excel because they target primarily middle-class populations. These are mass markets with the greatest potential for high-volume sales. Because many rivals have opted for more crowded high-end markets, these firms often face less competition.

They, too, take a local approach to business, entering into partnerships with regional experts and tailoring products to consumer tastes. In Thailand, for example, use of disposable infant diapers more than doubled within a few years of Uni-Charm’s 2010 introduction of a thinner, more flexible diaper.

The firm now controls 60% of Thailand’s disposable diaper market. It recently replaced Kimberly-Clark Corp. (NYSE: KMB) as the number-two player in India’s disposable diaper market, with a 20% share.

At Daikin, air conditioner sales in China rose 13% in fiscal 2014 to $2.7 billion, and management expects double-digit growth again this year. In this case, the growth stems from an expanding force of loyal local distributors who receive extensive training and product support. Daikin projects it will increase its distributor force in China to 20,000 this year from 14,000 in 2013.

In the past two years, Uni-Charm’s ADRs have risen nearly 40% and Daikin’s are up more than 70%.

Examples of other major Japanese firms that do substantial business in emerging markets: drug maker Takeda Pharmaceutical Co. (OTC: TKPYY); automakers Toyota Motor Corp. (NYSE: TM) and Nissan Motor Co. Ltd. (OTC: NSANY); packaged foods producers Nissin Foods Holdings Co. (OTC: NFPDF) and Toyo Suisan Kaisha Ltd. (OTC: TSUKY); information technology firm Hitachi Ltd. (OTC: HTHIY) and consumer electronics giant Panasonic Corp. (OTC: PCRFY).

Risks To Consider: Like Europe and the United States, Japan is relying heavily on easy monetary policy to support its economy and stock prices. This is raising concerns about dangerous bubbles developing in Japanese financial markets before monetary stimulus can push inflation up to target levels.

Action To Take –> Consider Mark Mobius’s advice to invest in emerging markets indirectly through Japan. By owning Japanese multinationals, investors can take part in the most robust portions of developing economies without the degree of political, stock market and other risks that can come with direct investment.

Those who prefer individual stocks might begin their research with the firms mentioned in this article.

Fund investors have many high-quality choices for broad exposure to Japanese multinationals with large emerging-market footprints. These include Matthews Japan Investor (NYSE: MJFOX), Aberdeen Japan Equity Fund, Inc. (NYSE: JEQ) and the SPDR Russell/Nomura PRIME Japan ETF (NYSE: JPP). These three funds each have solid performance records and below-average expense ratios.

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