Warren Buffett might be leading the pack on Japanese stocks—but not everyone’s convinced now is the time to jump in.
Japan’s trading houses—known as sogo shosha—have recently had an influx of interest following a visit earlier this year from the Berkshire Hathaway owner, who has been upping his stakes in the country’s largest trading houses for the past couple of years.
Buffett purchased a 5% stake in Itochu, Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., and Marubeni in August 2020.
In November 2022, Reuters reported that this had been upped again, with a regulatory filing showing Berkshire now owns 6.59% in Mitsubishi, 6.62% in Mitsui, 6.21% in Itochu, 6.75% in Marubeni, and 6.57% in Sumitomo.
However, Bank of America—also one of Buffett’s most prized investments—has issued a note of caution to counter the renewed interest in the geography.
Strategists Shusuke Yamada and Tony Lin wrote that calls to “Buy Japan”—purchasing Japanese stocks and currency—are “premature.”
In a note released earlier this week and seen by Fortune, the pair explained: “In our view, the Japan trade for 2023 is to buy Japan equities, funded by JPY (‘yen carry trade’).”
A carry trade is an investment strategy which sees firms and individuals borrowing at a low interest rate and re investing it in an asset with a higher rate of return.
“We remain bearish on JPY in 2023 despite its cheapness for two reasons—a persistent foreign direct investment (FDI) deficit and a potential rise of yen-carry trade,” Yamada and Yin wrote.
Japan’s outward investment
There are some positive catalysts for the Japanese yen, the pair pointed out, in the form of a recovery of the nation’s current account surplus—buoyed by lower oil prices and the return of inbound tourists as pandemic restrictions continue to wane.
Yet the pair said these positives are not “enough to correct the yen’s undervaluation as Japan’s FDI deficit remains wide and the BoJ (Bank of Japan) does not seem willing to raise interest rate in the near term.”
Japan’s FDI deficit has arisen out of the fact that Japanese companies continue to engage in outbound investments into other territories, at a rate outpacing inbound foreign investment from the likes of Buffett.
The latest data from the Japanese Ministry of Finance shows that equity purchases into the country are already beginning to drop off—falling from 2.4 trillion yen in the first week of April to 867.5 billion yen in the week of May 14–20.
The reason, the strategists said, is that “Japan’s demographic constraints keep expectations for its economic growth rate lower than for the rest of the world and encourage Japanese companies to expand abroad.”
On top of this, the Bank of Japan’s “distinctively accommodative policy stance” is allowing companies to expand their balance sheets, as well as businesses facing pressure to reinvest unused cash.
However, Japan could be a long-term prospect starting next year, the pair said.
A trade for next year could be buying both equities and “buying Japan” generally, they added: “If Japan’s wage inflation proves sustainable and the government implements effective measures to promote inward FDI and domestic capex, both Japan equities and JPY can rise and ‘buy Japan’ can be the right trade. However, we think this is a potential story for 2024, not 2023.”
They added that the trade is “conditional on confirmation of a virtuous inflation cycle in Japan and the government’s policy to promote domestic capex and inward FDI.”
Buffett’s adventures in East Asia have certainly been successful thus far—the $6 billion bet he first made has now swelled to $16 billion, according to Markets Insider, courtesy of flying share prices at the sogo shosha.
Marubeni shares have approximately quadrupled in value since Buffett confirmed he was on board, Mitsubishi and Mitsui shares have at least doubled, and Itochu and Sumitomo have gained at least 65%.
Buffett and his team have also hedged against further currency depreciations by issuing yen-dominated bonds.
He explained: “They’re doing intelligent things, and they’re sizable, so we just started buying them. We are $4 billion or $5 billion ahead plus dividends.”
In an interview with CNBC, Buffett described the prices of the stocks as “ridiculous” relative to the prevailing interest rates at the time, making them a bargain.
Buffett has also set out his stall to continue working closely with the sogo sosha, telling Nikkei Asia last month he wanted to be the first port of call for the firms if they were looking to raise funds.
“We don’t think it’s impossible that we will partner with them at some point in the future in a specific deal,” he said. “We would love if any of the five would come to us ever and say, We’re thinking of doing something very big, or we’re about to buy something and we would like a partner, or whatever.”