It's undoubtedly a quirk of timing. But just as the author of Abenomics steps down, Japan's economy has received a vociferous vote of confidence from one of the world's most-famed investors.
Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) has confirmed that it has spent more than US$6 billion to take a 5% stake in each of Japan's biggest soga shosha, its general trading houses.
You can't get more Japanese than the likes of Mitsubishi (MSBHY), Mitsui (MITSY), Sumitomo (SSUMY), Itochu (ITOCY) and Marubeni (MARUY). They are the country's industrial giants.
These massive conglomerates trace their roots to the 19th century, after Japan opened its borders to international trade. They typically traded textiles and mined commodities, but soon branched into heavy industry and formed vertical distribution lines in many sectors.
They're a typical Buffett play, too. The man who says he won't invest in anything he doesn't understand announced on Sunday, Buffett's 90th birthday, that the Berkshire stakes in these companies that drill for oil, launch ships, build roads and construct power plants could rise as high as 9.9% if all goes well.
Their large cash balances and cheap valuations would also attract Buffett's attention. All except Itochu are trading below their book value. They own hard assets, but those assets come cheaper than the market cap of the companies.
Out of favor, until now
The trading houses have been little loved by investors of late. Tech, not oil and gas, sets the pulse racing. Buffett has built the stakes in Tokyo trading over the last year through the insurer National Indemnity. Reuters calculates the 5% holdings are now valued at around US$6.6 billion.
The shares of the five conglomerates jumped in Tokyo trading on Monday as investors got their first chance to respond. Marubeni closed up 9.5%, Sumitomo climbed 9.1%, Mitsubishi saw a 7.7% gain, Mitsui rose 7.4%, and Itochu finished 4.2% higher, at a record high.
The trading houses generally have underperformed Japanese stocks in general at a time when Japanese stocks are beaten down. The benchmark Topix index of all major shares in Tokyo is down 6.0% year to date, whereas the stock markets elsewhere in East Asia (bar politically plagued Hong Kong) are higher. Marubeni, Mitsubishi and Sumitomo are all down at least double Japan's average loss even after Monday's gains.
Japan this month reported its worst-ever economic quarter. Gross domestic product contracted 7.8% in the June quarter from the previous three months, the poorest figures since the current record keeping began in 1980. It also produced an annualized decline of 27.8%.
Japan's economic engines
Companies such as the trading houses are the entities that drive Japan's industrial output. They have been spinning out cash flow, are involved in industries that are hard to enter, and pay dependable, decent dividends.
Berkshire is sitting on a record US$146.6 billion in cash. Many observers have noted that its large holding, Apple (AAPL) , has now risen to US$125 billion, meaning Buffett's company is over-concentrated there and is in an atypical tech-focused holding to boot.
Berkshire does have international holdings, but it's unusual for the company to invest wholesale in a sector as it has done with stakes in the five soga shosha all at once rather than identifying favorites. The low borrowing costs in Japan, where short-term interest rates are below zero, likely have been an encouragement. The trading houses also are incredibly diversified, including overseas. So this is a bet on the world's third-largest economy, both at home and as it invests abroad. It's also a commodities play, with soga shosha values pushed down by the low price of many raw materials, their bedrock.
"I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies we have chosen for investment," Buffett said in a statement on the purchases. "The five major trading companies have many joint ventures throughout the world and are likely to have more."
Buffett's investment is a posthumous vote of confidence in the economic reforms implemented by Japan's longest-serving prime minister, Shinzo Abe. Beset with a sudden deterioration in the economy but also faulted for his absent leadership in responding to the coronavirus, Abe said on Friday that he will step down. There also have been recent scandals over political cronyism and suspect land deals.
