Why Is Berkshire Buying Japanese Companies?

Why Is Berkshire Buying Japanese Companies? Every decision Warren Buffett and Berkshire Hathaway makes sends ripples throughout the investment community. When someone makes profitable decisions as often as Buffett, people tend to pay attention. Recently Berkshire bought stock in several Japanese companies. What could that mean for the future of the stock market and global economy?

Buffett Latest 13F Was a Big Surprise

Every quarter, institutional investment managers must submit a Form 13F to the Securities and Exchange Commission (SEC). It only applies to those managing $100 million or more in assets, and Warren Buffett certainly qualified.

A 13F, however, can reveal the thinking behind some of the world’s biggest, most successful investors.

Form 13F shows what changes managers have made to their investment strategies. The latest 13F from Berkshire Hathaway contained some surprises like:

• A 61.25% reduction in JPMorgan Chase & Co investments.
• A 26.49% reduction in Wells Fargo & Co holdings.
• A 9.29% divestment in Bank of New York Mellon Corp.

Berkshire Hathaway sold all of its shares in:

• Occidental Petroleum Corp.
• Goldman Sachs Group
• Restaurant Brands International
• American Airlines Group
• United Continental Holdings Inc.
• Southwest Airlines Co.
• Delta Airlines Co.

Selling airline stocks sounds reasonable since the pandemic has restricted air travel and practically eliminated international travel. Selling so many shares in banks, though, made investors question what Buffett sees for the near future.

Berkshire Selling Banks Was Half the Story

It’s impossible for investors to ignore how many bank shares Berkshire sold last quarter. Cutting more than 60% of shares in JPMorgan Chase clearly says something important. Selling off every share of Goldman Sachs Group, however, is a huge red flag that should warn everyone about the banking and lending industry.

Why would Berkshire Hathaway sell so many bank stocks? The most convincing theory points to an impending eviction problem. American consumers have already spent their stimulus checks on rent and mortgage payments.

Now that the federal government no longer provides an extra $600 in unemployment, it’s difficult to imagine how people will continue repaying bank loans.

States do not have unemployment insurance that can cover rent and mortgage payments. In Louisiana, for example, unemployment insurance recipients can receive a maximum of $247 per week. Some people are eligible for an extra $300 weekly payment from the federal government. Not everyone qualifies, though.

Without a serious shift in financial support, banks could lose a lot of money in the upcoming year as they face unprecedented mortgage defaults (JP Morgan has put $10 billion aside for loan loss provisions). Berkshire Hathaway was smart to pull their support from an industry that has little hope of profiting.

Warren Buffett Buys Japanese Stocks

The move away from banks wasn’t the only strategy that grabbed the attention of investors. People also noticed that Berkshire Hathaway added Japanese stocks to its portfolio.

Buying Japanese stocks may show that Warren Buffett wants to expand his investments far beyond the United States and Europe. That makes sense. After all, the global economy has been growing and connecting countries for decades.

[1] Need To Deploy Cash

But some more likely reasons are his need to deploy cash. With over $140 billion of cash sitting on his balance sheet, Buffett needed to deploy cash that would otherwise be hurt by inflation.

[2] Concern Over US Economy

A second reason might be his serious concern for a more protracted economic downturn from Covid. Spreading investments to high-performance companies in other companies also help offset the risk of investing in American companies.

Compared to many developed countries, the United States has not done a great job controlling the COVID-19 pandemic. Several states that loosened restrictions have had to enforce stricter rules on businesses.

Experts point to the federal government’s lack of a coordinated, aggressive attack against the disease. Other experts note that many Americans simply don’t take the virus seriously. Many don’t wear masks and break distancing guidelines. Regardless, Buffett may seem a long, difficult economic recovery for the United States.

[3] US Dollar Currency Concerns

Another reason Buffett may have elected to invest abroad is his concern over the Federal Reserve balance sheet ballooning.

There are serious concerns that the US dollar may suffer long term as a result of the enormous debt levels now.

[4] Synergies 

If Buffett is anything it’s a visionary. He describes Berkshire as his masterpiece much like Michelangelo would view a mural or sculpture as his. 

And it’s very possible that Buffett see synergies between his Berkshire subsidiaries and the Japanese firms in which he’s invested.

Which Japanese Companies Did Buffett Buy?

Berkshire Hathaway picked up five Japanese stocks. Buffett and his crew decided to buy about 5% in:

• Itochu Corp.
• Marubeni Corp.
• Mitsubishi Corp.
• Mitsui & Co.
• Sumitomo Corp.

Like companies all over the world, these Japanese firms experienced short-term crashes in mid-March. Many of them, however, have already recovered. Itochu has actually improved its share value. In February 2020, a share in the company cost about $48. At the beginning of September, shares exceed $52.

What Does Buffett Buying Japan Mean?

Buffett could have several reasons for investing in Japanese businesses.

One hypothesis says that Buffett wants to invest in the safety that Japan offers. Japanese companies don’t tend to experience the highs and lows that have become common among American businesses. They have a more stable approach to conducting business, so stock values don’t tend to fluctuate wildly.

By adding “safe” investments to Berkshire Hathaway’s portfolio, it helps protect itself from the roller-coaster stock market that many people expect the U.S. to experience soon.

Another hypothesis says that Buffett is looking to drop more American companies that underperform. The federal government has not made it easy for analysts to predict stability in the stock market.

Delaying payroll taxes, for example, might seem like a good short-term idea. By 2021, though, companies will need to pay those taxes. Delaying payments could encourage American companies to make risky decisions that deny the coming reality.

Buffett may also have his eyes on population decline. As America’s birthrate declines, it’s hard to imagine how companies and the government will honor their pension, Social Security, Medicare, and other financial obligations. That thesis could run into problems given that Japan has an even greater problem of population decline.

Regardless of the reason, it’s time for smart investors to start looking to Japan for more opportunities.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.