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Warren Buffett's Japan Bet: There's More To Come

Editorial Staff, 7 September 2020

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A large investment firm based in Japan considers Warren Buffett's recent decision to build stakes in Japanese financial firms, and thinks this points to a more profound change in attitudes about the Asian country's economic and market prospects.

This news service reported recently on how legendary US investment figure Warren Buffett, aged 90, bought minority stakes in a raft of Japanese financial firms. Buffett may be keen to diversify out of the US for various reasons (high domestic valuations, concerns about politics, taxes, the dollar exchange rate, domestic unrest, and increased enthusiasm for Japan and Asia). In short, Buffett is not just another investor – when he acts, people talk. His annual letter to investors, for instance, is closely read by wealth managers. 

John Vail, chief global strategist, Nikko Asset Management, is certainly paying attention. And as he knows, the Buffett move happened at the same time that long-serving Japan prime minister Shinzo Abe announced that he is standing down. Japan is on investors’ lips. The editors of this news service are pleased to share these thoughts with readers and invite responses. Jump into the conversation! The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Although it is fairly clear that Buffett’s investment is not just a passive one in that he intends to collaborate on business ventures with these trading companies, the fact that the world’s most famous investor has committed to such large sums has ramifications for both domestic and international perceptions about Japanese equities. Included in this are his trust in the accuracy of accounting practices and of corporate governance in general, not to mention in these companies’ strong business acumen. He also held true to his maxim of buying good value stocks when they were unloved. Altogether, these should inspire investors in Japanese equities to a significant degree, as much of the market is characterised as “unloved value,” and make them wonder if there are other Japanese sectors that he may target.

As for the basics, many analysts cite his purchases being value stocks but don’t mention just how much “value”: approximately 6 per cent dividend yield in recent quarters and nearly 5 per cent in the quarters before that, when Buffett started accumulating. This is an extraordinarily high return globally for a solid sector in a country with a solid currency. Normally, this would imply major dividend cuts sometime in the future, especially in a time of crisis. However, Buffett clearly thinks otherwise and for good reasons. 

As a part of continuing efforts on corporate governance reform, in recent quarters he has publicly urged corporations, as a sign to investors of their confidence in their companies’ futures, not to cut dividends except in dire circumstances. Fortunately, this “Show Me The Money” governance held true at the trading houses as they maintained dividends at their record high levels, thus proving that they do have business confidence and also care about shareholders. Along with retaining this overall purpose, as they compete among each other to retain Buffett’s praise, it seems very likely that they will continue to pay such high dividends. Helping with such, although the sector’s earnings have fallen along with energy prices and domestic economic activity, they should rebound along with the global economy.

Why is it important not to cut dividends? Because equity income investing is key to the success of Abenomics via the creation of a risk-taking, domestic equity culture. Indeed, building such a culture was the initial reason for the BOJ’s purchases of equity ETFs: improve risk-taking to pull Japan out of deflationary psychology and low asset prices, and let the wealth effect, both from housing and equities, inspire a virtuous cycle of economic growth.

Fortunately, very few companies have cut dividends during this crisis, so, along with this Buffett fillip, the domestic equity-income culture should revive along with the economy from its depths. This news may also quieten those who suggest it is better for Japanese to invest in US rather than Japanese equities, for Buffett is saying the exact opposite, as he says he can hardly find anything worth buying in the US.

As for international investors, there will always be a plethora of sceptics, who are likely to note Buffett’s not purely passive stance. Indeed, perceptions prevail that Japan’s glass is more than half empty on all those fronts, and that to say otherwise is wild-eyed optimism. But among the outstanding concerns: 1) Japan’s economy has actually been very competitive with the US and is far outstripping Europe this year as per this previous report; 2) Demographics are always a lingering concern among the macro or less-knowledgeable investors, but as he has stated for six years since his piece “Debunking Demographics,” corporate profit margins and overall profits have surged despite this headwind thanks to improved corporate governance, technology and efficiency, successful business implementation and gearing to global economic growth, especially in China; 3) the new foreign investor law (Foreign Exchange and Foreign Trade Act) worried some investors in the past, but it has only had a minor negative effect as a result of well-targeted exemptions. Such certainly did not dissuade Buffett or prevent him from being able to quietly build large stakes; 4) Japan’s heavy exposure to capex and automobiles worries some investors, but the diversification of supply chains by corporations globally should boost capex spending, and capex for semiconductors fabs, in which Japan excels, seems ripe for continued growth. Auto stocks may not seem “cool” but auto sales are rapidly rebounding globally towards pre-crisis levels and Japan leads the world in the ESG-friendly hybrid vehicle sector.

In sum, the Buffett fillip, while not solving all issues, is likely to mark a true turning point for Japanese equities, as no one will be able to speak quite as dourly, as the retort should typically be “But Buffett Disagrees”.

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