In terms of land mass, the United States dwarfs the island nation of Japan. The US is roughly 26 times bigger, and its population is more than twice as large. However, despite its smaller size, Japan holds a powerful position in the world economy.
Dozens of Fortune 500 companies are headquartered in Japan, including automotive powerhouses like Toyota, Mitsubishi, and Honda. Japanese technology can be found in nearly every US household, including brands such as Sony, Panasonic, Canon, and Toshiba.
Japanese exports play a central role in the global trade of medical products, electrical machinery, and all types of vehicles. In October 2022, the value of those exports totaled 9 trillion yen ($64 billion). But Japanese imports are even more important to trading partners. In the same month, imports totaled 11 trillion yen ($79 billion).
The ability to import essential goods like food, energy, and the raw materials used in manufacturing is critical to the Japanese economy. The country has limited natural resources, so it relies on trading partners to provide the basics. It has developed an efficient system to manage these logistics, which has contributed to its $5 trillion economy – the third largest in the world behind the United States and China.
Nonetheless, it came as a surprise when, in 2020, Warren Buffett invested in Japanese stocks. Before this move, his holdings were almost entirely limited to US-based companies. Why did Buffett buy Japanese stocks? And what stocks were they? Are those stocks still a buy?
What Japanese Companies Did Warren Buffett Invest In?
August 30, 2020, was an auspicious day. Not only was it Warren Buffett’s 90th birthday, but it was also the day he made an unexpected announcement. He told investors that his holding company, Berkshire Hathaway, had invested approximately $6.25 billion in Japanese stocks over the preceding 12 months.
Buffett said that Berkshire Hathaway purchased a five percent stake in each of five companies:
- Itochu Corp.
- Marubeni Corp.
- Mitsubishi Corp.
- Mitsui & Co.
- Sumitomo Corp.
The very fact that Buffett bought Japanese stocks was rather startling, but the bigger question on everyone’s mind was why.
These five companies weren’t well-known among American consumers, and few American investors clearly understood their importance. H
owever, as analysts dove deeper into the trades, they saw that Buffett’s decision to invest in Japan’s “big five” Sogo Shosha or general trading houses was nothing short of brilliant.
What Is A Japanese Trading House?
Trading companies can be found in some form worldwide, but Japanese trading houses are in a category all their own. They operate under a unique business model that hasn’t been duplicated in size and scale elsewhere.
The Japanese know the trading houses as Sogo Shosha, and they have been an integral part of the Japanese economy since before World War II.
Like other types of trading companies, they arrange for the purchase and sale of goods and services, but they do it on a massive scale that extends to virtually every aspect of the Japanese economy.
The Japanese trading houses are responsible for the trade of hardware and software, as well as developer businesses like social infrastructure development, urban redevelopment, and IT solution implementation services.
They manage the commercialization of tech patents and the licensing of Japanese brands. On top of that, they have extensive financial functions that include credit management, and they often participate in the direct management of the businesses that fall under their umbrellas.
For the most part, any company interested in doing business in Japan must eventually partner with one of the major trading houses. That puts Sogo Shosha in control of imports and exports, which is a prime position to realize substantial profits.
Why Is Warren Buffett Investing In Japan?
Japan’s population tends to be better-educated and more affluent than most countries, and its large economy makes it an attractive market for international trade. Buffett understands the importance of these trading houses’ role in global trade and knows a good value when he sees one.
Buffett began building Berkshire Hathaway’s position in Japanese stocks towards the end of 2019 and through 2020, when Japanese companies traded at a significant discount compared to the United States.
At the time, the five he selected traded at a 35 percent discount against the Japanese TOPIX index. More strikingly, they traded at a 79 percent discount to the S&P 500 when evaluated by price-to-book ratio.
Buffett has always been a strong advocate for value investing, and these stocks were clearly in that category. Furthermore, their dividend yields fall between three to five percent, which ticks off another of the criteria on Buffett’s stock selection checklist.
Buffett said that he intended to hold the shares long-term, and he indicated that adding to his stake in the trading houses wasn’t out of the question.
Buffett indicated confidence in the investment and assured Berkshire Hathaway shareholders that the risk of currency fluctuations was negligible. He was able to offer that assurance because Berkshire Hathaway owns nearly $6 billion yen-denominated bonds with staggered maturity dates ranging from 2023 through 2060.
Is Japan A Good Investment?
Two years have passed since Warren Buffett announced his investment in Japan stocks, and it doesn’t appear that his enthusiasm has cooled.
In November 2022, Berkshire Hathaway regulatory filings showed the holding company had increased its stake in each of the five trading houses by at least one percent.
Aside from the fact that Buffett believes in the value of these stocks and is confident in their long-term growth, market experts suggest that now is the best time to buy Japanese stocks. The current exchange rate is favorable against the US dollar, and Japan is running national and regional campaigns to encourage new business ventures.
Regulations have become more friendly to travelers, including those in the country for business, and they have also adjusted to provide better support for shareholders. The changes have prompted improvements in corporate governance, productivity has increased, and many impacted companies have achieved stronger cash positions.
These advantages make Japan stocks an intriguing potential addition to an otherwise diversified portfolio. If trading houses aren’t a great fit, it is worth noting that Berkshire Hathaway also has a $4.1 billion stake in Taiwan Semiconductor Manufacturing.
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