T. Rowe Price Japan Fund commentary for the fourth quarter 2014.

Environment

Japanese equities posted strong returns over the quarter in local currency terms. In U.S. dollars, the market declined, primarily due to the weak yen. The Japanese economy contracted in the third quarter and slipped into recession (commonly defined as two consecutive quarters of economic contraction), but investors are hopeful for better growth ahead. Prime Minister Shinzo Abe is pushing the Bank of Japan (BoJ) to inject more funds into the financial system through purchases of government bonds and other debt instruments, and the central bank intends to introduce more currency depreciation measures (the yen is already at a seven-year low versus the U.S. dollar) to revive growth. Prime Minister Abe announced a postponement of the planned sales tax and a snap election, which the ruling coalition won convincingly, reaffirming its mandate for reform.

T. Rowe Price Japan Fund Performance

The Japan Fund returned ?5.94% in the quarter compared with ?2.77% for the TOPIX Index and ?1.76% for the Lipper Japanese Funds Average. For the 12 months ended December 31, 2014, the fund returned ?8.52% versus ?3.33% for the TOPIX Index and ?2.99% for the Lipper Japanese Funds Average. The fund’s average annual total returns were ?8.52%, 6.61%, and 1.74% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund’s expense ratio was 1.06% as of its fiscal year ended October 31, 2013.

T. Rowe Price Japan Fund: Portfolio Highlights

We maintained IT and services as the portfolio’s largest overweight. We are bullish on the industry, specifically the potential for improving earnings fundamentals, while valuations also look attractive. In particular, we remain overweight to staffing agencies, as signs of a tightening labor market would be a key positive for the industry. We have added to the automobiles and transportation segment, making it the second-largest overweight sector versus the benchmark. The sector should benefit from the decline in input costs, and the weaker yen will help boost competitiveness against international rivals.

T. Rowe Price Japan Fund: Outlook

Japan has made several efforts at corporate reform in recent months that offer longer-term potential to investors. Corporate tax rates have been lowered, an enhanced corporate governance code has been implemented, and initiatives encouraging married women and foreign workers into the labor force have been announced. Other significant incentives for corporations to be more shareholder-friendly are also being put in place. For example, the new TOPIX 400 Index selectively lists companies that demonstrate a focus on profitability gains and are addressing governance issues. The volume of shareholder buybacks is increasing, while mergers and acquisitions activity is slowly emerging. Where implemented effectively, we expect such actions to be rewarded through higher valuations.

T. Rowe Price Japan Fund Q4 2014 Letter