Learn From Buffett's Japan Bet: How to Invest in Japan Market

Warren Buffett increased bets on the Japanese stock market. The latest earnings report released on Saturday shows that Berkshire Hathaway has increased its shares in Japan's five major trading companies, including Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni, to about 9%. The firm spent 1.6 trillion yen (US$10.63 billion) on these stakes, totaling 2.9 trillion yen by the end of 2023, marking an 81% gain in yen and a 61% gain in dollars, significantly boosting investor sentiment.

The Five Japanese Trading Houses, or "sogo shosha," including Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni, are massive conglomerates with diversified business operations in various industries such as natural resources, energy, chemicals, metals, manufacturing, retail, real estate, and healthcare. These companies share similarities with Berkshire Hathaway's approach to business. They retain a significant portion of their earnings for business development and stock buybacks,distributing only about one-third as dividends.

Since Berkshire Hathaway started investing in these five companies, they have all adopted a shareholder-friendly approach and reduced the number of outstanding shares at favorable prices. Mitsubishi Corporation stands out as a prime example, with its plan to buy back up to 10% of outstanding shares in February, resulting in an all-time high stock price.

Calling it a "monster buyback" that "market participants were not expecting," Jefferies analyst Thanh Ha Pham said the company had "another 500bn yen excess cash that it could return to shareholders".

Despite reaching new highs, the Nikkei 225 index is still valued lower than major US indices with a rolling P/E ratio of 22.1 times compared to 26.2 times for the Dow Jones, 40.3 times for the Nasdaq, and 25.5 times for the S&P 500. With the possibility of a Fed rate cut and USD liquidity expansion next year, there may be potential for the Japanese stock market's valuation to increase.

AJ Bell investment director Russ Mould said: "Company valuations are attractive versus the US."

"There is the potential to get a growing stream of dividends thanks to a structural shift in the country for corporates to be more shareholder-friendly." he added.

Recently, the Japanese stock market has seen a significant rise in value, attracting the attention of many investors.

The Japanese stock market maintains its strong rally, with the benchmark Nikkei 225 Index eclipsing its 1989 historical peak of 38,957.44 points to set a new all-time high. As of Monday's close, the index has further extended its gains, with the Nikkei 225 closing at a record-breaking 39,233.71 points.

The market could see another run-up after reaching an all-time high, "so long as companies post strong earnings in the next reporting season," said Toshikazu Horiuchi, equity strategist at IwaiCosmo Securities.

The waning impact of temporary factors that spurred growth in 2023, such as yen depreciation, post-pandemic demand recovery, and revived business investments, may slow down Japan's 2024 economy. However, as the reflation process is still ongoing, there remains significant potential for domestic demand, particularly in consumer spending and investment.

Moreover, Japan's loose monetary policy has underpinned a rise in stock prices. In a recent report, T. Rowe Price's expert on emerging markets and Japanese equities, Daniel Hurley, highlighted that the weak yen is a primary factor driving equity gains.

Last year, Japan Exchange Group Inc. urged listed firms to boost their share prices and capital efficiency to heighten appeal to investors. The request led to companies initiating share buybacks and increasing dividends to enhance shareholder value.

Activist investors are pushing for higher market valuations, improved governance, and increased share buybacks from companies. In 2023, listed Japanese companies announced a record 9.9tn yen in combined share buybacks, as reported by Jefferies.