Warren Buffett might be leading the pack on Japanese stocksbut not everyones convinced now is the time to jump in.
Japans trading housesknown as sogo shoshahave recently had an influx of interest following a visit from the Berkshire Hathaway owner earlier this year, who has been upping his stakes in the countrys 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 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 Americaalso one of Buffetts most prized investmentshas issued a note of caution to counter the renewed interest in the geography.
Strategists Shusuke Yamada and Tony Lin wrote that calls to Buy Japanpurchasing Japanese stocks and currencyare 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 reasonsa persistent foreign direct investment (FDI) deficit and a potential rise of yen-carry trade, Yamada and Yin wrote.
Japans outward investment
There are some positive catalysts for the Japanese yen, the pair pointed out, in the form of a recovery of the nations current account surplusbuoyed 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 yens undervaluation as Japans FDI deficit remains wide and the BoJ (Bank of Japan) does not seem willing to raise interest rate in the near term.
Japans FDI deficit has arisen out of the fact that Japanese companies are continuing 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 offfalling from 2.4 trillion yen in the first week of April to 867.5 billion yen in the week of May 14 to 20.
The reasons, the strategists said, is because Japans 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 Japans distinctively accommodative policy stance is allowing companies to expand their balance sheets, as well as businesses facing pressure to reinvest unused cash.
2024 potential
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 Japans 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 the trade is conditional on confirmation of a virtuous inflation cycle in Japan and the governments policy to promote domestic capex and inward FDI.
Buffetts adventures in East Asia have certainly been successful thus farthe $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: Theyre doing intelligent things, and theyre 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 dont think its 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, Were thinking of doing something very big, or were about to buy something and we would like a partner, or whatever.
