Reconstruction following the devastation of 2011’s earthquake and tsunami is expected to generate some of the anticipated economic growth of 1.5%-2% for Japan in 2012. Good investment opportunities include the energy companies that are providing power to fill the void left by the nuclear power plants that were shut down after the recent natural disasters.

“The basic message is that after the massive shock to the economy, things are going to get better,” says Charles Edwardes-Ker, vice president, director and portfolio manager with TD Asset Management Inc. in Toronto,

On Nov. 21, 2011, Japan’s government announced the year’s third supplementary budget, amounting to 12 trillion yen — more than $150 billion and equivalent to about 1% of gross domestic product — in additional spending focused on restoration and repair of infrastructure damaged or destroyed by the natural disasters.

Japanese consumers are expected to bring forward their purchasing timetables to avoid paying higher taxes when the sales tax rises to 8% in March 2013 and 10% a year later from the current 5%, says Erwin Hidalgo, vice president with Investors Group Inc. in Hong Kong and portfolio manager of IG Investors Japan Growth Fund.

Japan’s exports, always an important driver of that country’s economy, also should hold up quite well. More than 50% of Japan’s foreign sales are to China and other Asian emerging markets, which shields Japan somewhat from the turmoil in Europe and the sluggish growth in the U.S. Although China’s growth is slowing, many economists still expect that country’s economy to expand by around 8% this year, down only slightly from the 10%-plus in the past decade — and the story is similar in the rest of Asia.

This export mix means, Hidalgo says, “Japan is possibly one of the most highly geared markets to a global recovery.”

But even with these economic boosters, he adds, GDP growth in Japan will still be quite modest for 2012, at roughly 1.9%. The dark clouds of an aging population, high government debt and the stubbornly high yen continue to loom over future growth.

Japan has one of the oldest populations in the world. Its working-age population, the main taxpayers, is shrinking, making it more difficult to support the increasing numbers of retirees.

Government debt is high — around 200% of GDP — which means the government doesn’t have funds to stimulate the economy and has to raise taxes, albeit with some delay, to pay for the reconstruction.

The yen remains high, which hurts Japanese exporters’ earnings. As a result, Hidalgo says, many Japanese companies will be downgrading their earnings guidance.

Nevertheless, Hidalgo and Edwardes-Ker see some good investment opportunities.

Hidalgo likes factory automation and trading houses. Japan is at the forefront of robotics, which is of great interest to China, whose businesses are mechanizing factories. He particularly likes Fanuc Corp. and Omron Corp.

Japan’s trading houses invest globally in resources such as oil, gas, gold, coal and iron ore, many of which are key inputs for China’s industrialization and urbanization. Hidalgo favours Mitsui & Co. Ltd., which recently announced that one of its investments in Mozambique has discovered a gas field with up to 30 trillion cubic feet of recoverable gas.

Edwardes-Ker is taking a close look at Japanese energy companies, pointing out that 75% of Japan’s nuclear plants are currently offline due to maintenance and damage, so Japan will need other sources of energy. Tokyo Gas Co. Ltd. is one opportunity: its stock’s valuation is low and it is committed to returning 60% of its net profits to shareholders via dividends or share buybacks.  IE