Warren Buffett piles in on Japan, earning ultra-easy USD profit from ultra-easy yen debt

The human stock-picking juggernaut that is Warren Buffett has doubled down on the Japanese gamble he began back in 2020, upping his stakes in his Japanese holdings and almost certainly providing further ballast to the steady rise of Japan’s stock markets.

Buffett’s Berkshire Hathaway revealed on Monday that its wholly-owned subsidiary National Indemnity Co has added further weight to the headline stakes in five of Japan’s seven giant “sogo shosha” trading firms to an average over 8.5%.

Berkshire’s five sogo shosha companies in alphabetical order are: Itochu, Marubeni, Mitsubishi, Mitsui and Co and Sumitomo.

The trading firms’ regulatory filings of June 12 showed Berkshire holding 7.4% of Itochu’s stock, 8.3% of Marubeni and Mitsubishi’s stock, 8.1% of Mitsui’s stock and 8.2% of Sumitomo’s stock.

Buffett has previously pledged the company will only purchase up to 9.9% of any of the five firms.

The Oracle of Osaka

The Oracle of Omaha and now Osaka, bought a 5% stake in the companies back in 2020 and has now reportedly made a profit of over US$4 billion in the investments.

The the “sogo shosha” trading co’s are specialists in sourcing the raw materials from around the world and shipping them to resources-poor Japan. They focus on diversified long-term investments that prioritise value and cash flow.

Traditionally, they have been central to imports of energy, minerals and food into Japan and exporters of finished products.

The sogo shosha are active across an extraordinary variety of commodities and materials from up and downstream products, foods and supply chain goods, wherein they work both as intermediaries, holding houses and logistical services.

A remnant of post-war reconstruction, the sogo shosha business model is uniquely Japanese. Although there are ‘trading companies’ of all sorts about the world, there’s nothing like these sprawling can-do trading giants.

The sogo shosha provide a credit management function and a financial facility, leaning on vast financial resources, while also investing in and taking part in the management of businesses as needed. In this regard they deal not only in hardware but also in software, they’re involved directly in developments from urban redevelopment and social infrastructure development, IT solution implementation services, and matching businesses such as licensing of fashion brands and commercialisation of high-tech patents.

The stocks are all up more than 30% this year.

Shares of Mitsubishi and Marubeni are up 62% year to date, with Mitsui up 44%, Itochu up 35% and Sumitomo 39% higher.

Marubeni’s business has more than tripled in market cap since Warren first turned up mid-2020. Shares of Mitsubishi have jumped more than 5x.

Japan is big (again)

Japan’s improving economic dynamism, its geostrategic repositioning and recent reformation of corporate governance have helped revived the near-forgotten American POV that Japan is and has been a reliable regulator of pro-shareholder capitalism.

Not least, Buffett’s investments – and the Oracle’s accompanying optimism via-a-vis Japan’s rousing economic prospects – have also seemingly been a shot in the arm for the Japanese bourse and in particular the Nikkei (N225) share average.

Ten straight, pretty fat weeks of gains have helped the Nikkei rise 28% this year.

It ended lower Friday, and Berkshire’s announcement came after the close on Monday when US markets were napping for the Juneteenth holiday, so it could be a fun week to watch what happens across Asian markets for once.

The Nikkei 225 index is also looking well-positioned after the latest interest rate decision by the Bank of Japan (BoJ) on Friday, when the central bank left interest rates unchanged at -0.1% and the 10-year yield target at 0.0%.

One thing the sogo shosha share – as major commodities traders — is a familiar sensitivity to the value of the US dollar, as well as to the price of commodities such as minerals, grain and oil.

The foreign currency earnings of the sogo shosha, backed by hard commodities from sources around the world, set the trading groups apart from companies with revenues and costs that depend more heavily on prices in domestic markets.

With rich cash flows unusually tied to those markets the businesses actually provide windows of opportunity and insight that a more mercenary investor than Warren Buffett might use to profit from his investment.

Compared to his portfolio out of Omaha, Buffett has significant stakes now in companies that earn a portion of their profits in dollars, while funding his purchase with long-term debt denominated in yen – ultra, ultra easy yen.

And on Friday, the more Dovish than the Former Artist Formerly Known as Prince, Bank of Japan (BoJ) once again unanimously decided to maintain its ultra-easy monetary policy while peeking about for clearer indications of sustainable inflation growth.

Min Joo Kang, ING’s senior economist in Seoul, says that day may actually be approaching.

“We believe that rising asset prices are another important factor in sustainable inflation. With recent rallies in Japanese equity markets and the gradual rise in housing prices, the positive wealth effect is likely to keep inflation above the BoJ’s target, in our view.

“We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.”

Big in Japan

A renowned long-term investor, Buffett’s Berkshire Hathaway said it plans to hold its Japanese investments for the duration.

Berkshire first announced the buys in 2020, and the additional purchases are in line with its plans to hold the stakes long-term and increase them to as much as 9.9%.

Buffett, who began quietly accumulating his stakes more than years ago now, visited Japan in April to a rock star’s welcome to announce that Berkshire would boost its investments in the various Japanese trading houses to 7.4%.

The Oracle of Omaha’s visit was the financial world’s equivelant of a tour by The Beatles. His unimpeachable track record of picking outright winners made him a welcome face when he popped into Tokyo to take the mood in local markets (and maybe pump it a little).

Every pro-Tokyo murmur from Buffett and his strong right arm Charlie Munger has been hailed locally as a restorative elixr and a vote of confidence in Japan’s once unstoppable corporate sector.

And while Berkshire Hathaway owns no other investments in Japan, the aggregate value of these interests surpasses that of Berkshire-held stock in any country outside of the US, the company noted on Monday.

According to Nikkei Asia, the five Japanese trading houses posted a combined net profit of 4.2 trillion yen (US$31.1 billion) for the fiscal year ended in March, more than quadrupling their earnings in two years.