If anyone doubted that Warren Buffett’s still got it, the investing legend’s contrarian bet on Japan should set the record straight.
In August 2020, the Oracle of Omaha shocked the Tokyo establishment with splashy investments in five old-economy companies. Oddly, Buffett grabbed 5% stakes in stodgy “sogo shosha” trading houses: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.
Things look infinitely less odd today. Not only have share prices doubled among Buffett’s targets, he managed to front-run the most powerful rally in Japanese shares since the early 1990s.
Buffett’s Japan bet also is getting a surprising assist from a slowing Chinese economy. As BlackRock CEO Larry Fink tells Nikkei Asia, investors “are de-emphasizing China because they’re worried about China’s economy, and they’re investing in Japan as they want to continue with their Asian exposure.”
Now, Buffett is doubling down on Japan. On Monday, his Berkshire Hathaway announced it purchased additional shares in all five trading houses, upping his average ownership to more than 8.5%.
The question, of course, is what Buffett knew that most other value investors didn’t. After all, even the man known as the “Buffett of Japan,” SoftBank Group founder Masayoshi Son, barely invests at home at all.
In 2017, Son rolled out the first of his titanically large Vision Funds, the initial one amounting to $100 billion. Since then, Son upended the venture capital game by investing big in the U.S., Brazil, China, India, Indonesia, Kenya, South Korea and elsewhere. But he’s been stingy about deploying capital inside Japan.
What’s needed, of course, is getting Buffett and his ilk to increase investments in Japan. And to get VC bigs like Son to target Japan’s underfunded startup scene.
Is Prime Minister Fumio Kishida’s government paying attention? Tokyo’s policy mix is the missing link.
The “Buffett effect” that tends to follow Berkshire Hathaway everywhere it goes is putting Japan in the global spotlight for all the right reasons.
The Nikkei Stock Average’s powerful rally—the benchmark is up 28% so far this year—is dwarfing gains in the Dow Jones Industrial Average, which is up 2.4%. To keep things going, though, Kishida’s government must close the gap between investor optimism and macroeconomic fundamentals.
There are three drivers behind Japan’s stock boom. One, ultraloose Bank of Japan policies. Two, government moves over the last decade to encourage companies to increase returns on equity and give shareholders a louder voice. Three, Japan’s relative appeal.
Behind this latter dynamic is a U.S. economy grappling with the worst inflation in decades, super aggressive Federal Reserve tightening and a rare degree of political turmoil in Washington.
Europe is struggling to avoid a slide into stagflation. The combination of elevated inflation and stagnant growth is an intensifying threat to corporate profits. China, meantime, is experiencing capital outflows as its post-Covid rebound disappoints. There’s even talk of deflation in Asia’s biggest economy.
Japan has daunting problems, of course. The highest inflation in decades collides with a government debt-to-gross-domestic-product ratio on the verge of 265%, the worst in the developed world. Also, the nation with the fastest-aging population recently recorded its seventh straight annual drop in childbirths.
Nor are innovation and productivity trends in Japan what you’d want in 2023. On a relative basis, though, Japan offers a unique mix of economic stability and a bevy of undervalued cash-rich companies. So, the Nikkei is having quite a moment.
Add in Fink’s observation on China—the idea that investors think Xi Jinping’s economy is heading for trouble—and there’s reason to think Japanese stocks have room to extend gains.
Yet there comes a point when investors look at the economy below — and question whether their exuberance might be on the verge of irrationality. Here, it’s hard to argue that the Kishida era that began in October 2021 has raised Japan’s economic game in any notable way.
Kishida’s pledges to implement a “new capitalism” that better distributes the benefits of GDP fell flat early on. So have his commitments to redouble efforts to cut bureaucracy, loosen labor markets, reinvigorate innovation and empower women.
Over the last decade, his fellow Liberal Democratic Party premiers Shinzo Abe (2012-2020) and Yoshihide Suga (2020-2021) also dragged their feet on building economic muscle—despite broad public support to do so.
Sure, Abe’s team prodded companies to listen to shareholders and add more outside directors to increase returns on investment. But the speed with which China Inc. spread its wings globally did more to awaken Japanese chieftains from their insularity than some modest government suggestions.
Kishida’s team is making the same error as the Suga and Abe governments before him: thinking he has loads of time to retool Japan’s economy. Tokyo doesn’t as China dominates Asian trade. It doesn’t as India, Indonesia and Vietnam produce new waves of tech “unicorn” startups at bewildering speed.
And, just as important, the government doesn’t have the luxury of time to give Buffett and peers representing the biggest of the big money reasons to bet aggressively on Japan. It’s high time Tokyo did just that and stepped up the pace of economic upgrades.