Japanese markets have made steady gains so far this week — and one bottom-up investor sees potential for them to advance even further. “When we look at Japan — it’s very difficult not to be bullish on stocks. Because even companies that are struggling in terms of earnings have depressed valuations and may not see a drastic fall in their stock price even if earnings are weak,” Mio Kato, founder of capital markets firm LightStream Research, said. “When we look at the valuations of a lot of companies, they look absurdly cheap,” he added. Speaking to CNBC Pro on Oct. 29, Kato noted that Japan is undergoing a period of “normalization” on the back of a pickup in domestic consumption, stronger tourist visits, better wage growth, increased confidence among the affluent population and more competitive exports. “I think this is extremely positive for the economy and is what underpins the possibility for the stock market to do extremely well — which is a change from the flat-lined economic outlook it had a decade ago,” Kato explained. The improving macroeconomic conditions, he noted, have benefitted companies, with many having better pricing power and stronger earnings. Kato’s comments come as Japanese markets have been in the spotlight following news that Prime Minister Shigeru Ishiba’s ruling coalition failed to secure a parliamentary majority in the nation’s elections. Japan’s benchmark index Nikkei 225 closed up 0.77% to 38,903.68 points on Tuesday, extending gains after the election results at the weekend. The Topix index advanced 0.91% to 2,682.02 points. Overall, the Nikkei 225 — which includes the top 225 companies on the Tokyo Stock Exchange — is up nearly 16.25% since the start of the year, while the Topix index is about 12.8% higher. Department stores Among the segments Kato is looking at favorably in Japan is department stores. Such stores, he explained, are patronized by the nation’s middle and upper-income population with higher spending power. One stock that stands out to him is Takashimaya . Kato describes the chain — which carries products ranging from apparel to electronics and homeware — as “one of the biggest beneficiaries of middle to upper-income spending.” His optimism on department stores is an interesting one, given that many have “not expanded for about 30 years.” Several, he noted, have “been shrinking” and closing outlets with poor footfall. Still, Kato sees potential in the longer term given strong domestic patronage. “The domestic demand increase is now complementing higher inbound demand from tourists for the sector. So overall, department stores look quite interesting,” he added. He also highlighted that the gradual retirement of older workers commanding higher salaries bodes well for the company. Such employees make up about two-thirds of a company’s headcount, thereby lowering its selling, general and administrative costs, and offering “operating leverage in terms of margins as [consumer] spending grows.” Food and beverage bet Another theme on Kato’s radar is food and beverage, thanks to their low margins that can disproportionately benefit from price hikes. These hikes, he noted can potentially raise operating profits, if costs hold. “We expect most of the companies in this sector to beat their guidance and consensus ratings,” he added, naming fast food chain Yoshinoya Holdings as one of his top picks. The company has seen a “significant improvement” in its profitability following a recent hike in its prices. It is now in the midst of deepening its presence in Southeast Asia, China and the U.S. While it is grappling with issues such as rising minimum wages in the U.S. and staying afloat in China’s ailing economy, Kato notes that is doing “extremely well domestically and recovering from the pressures abroad.” Automotive play Aside from the more consumer-focused sectors, Kato is “relatively positive” on automotives. Calling the sector “extremely cheap,” the investor noted that fears of a recession in the U.S. and a potential appreciation of the now cheap yen vis-a-vis the U.S. dollar may have deterred investors from piling into the sector. Even so, Kato believes automotive stocks are trading at attractive valuations. One name that stands out to him is Toyota Motor . The company is “extremely competitive” and has been able to withstand the pressure brought on by the shift toward electric vehicles in China, unlike its competitors Nissan and Honda , the investor highlighted. “Toyota is in a very strong position — I think their bet on having a balanced approach toward hybrid vehicles, plug-in hybrids, EVs and fuel cells is starting to pay off given that a lot of countries are now realizing the difficulty of a full transition to EVs,” Kato explained.