Investing in Japan this year looks even more eccentric than usual. The architect of the economic reforms that have come closest to getting Japan back on a growth tack, Shinzō Abe, has just stepped down as prime minister after eight years. The spirit of Abenomics may survive but without its guiding light Japan may slip back into its old corporatist ways.
This is the backdrop to Buffett’s significant bet that Japan can finally defy the sceptics and regain its Eighties mojo when the bookshelves were full of breathless titles such as Japan as Number One and Japan’s Economic Miracle. It may be a small slice of Berkshire Hathaway’s $147bn (£115bn) of spare cash, but $6bn is serious money in anyone’s book. Buffett has clearly thought this through.
On the face of it, the five-century-old trading houses – Mitsubishi, Mitsui, Itochu, Sumitomo and Marubeni – are an odd choice for an investor who has long made a virtue of investing in what you understand. The companies are notoriously complex, with a web of cross-shareholdings.
They do not have a great track record of returns – failing to even match their cost of capital in most cases. And they are dependent on cyclical, resource-focused operations for a large part of their profits. Other parts of their businesses in machinery, food and retail have suffered during the pandemic.
But to an extent this is the point. The businesses may be sprawling and deliver unexciting returns, but they are solid and stable, with a big international reach. And they are undervalued, partly thanks to their complexity. Most investors just can’t be bothered to understand what’s under the bonnet. Most of the houses trade at less than their book value. In this regard, they are a classic Buffett investment, the kind of share he learned about from his mentor, Benjamin Graham.
In a world in which the growth investment style has prevailed for years, Japan is the ultimate value investing market. It is perhaps inevitable that Buffett should have crossed the Pacific.
Buffett’s wager on Japan should also be seen as a bet against his home market. It is no coincidence that news of the five trading house stakes should have emerged in the same week that the Nasdaq index of mainly technology-focused stocks should have fallen into correction territory, down 10pc from its peak in a matter of days.
The echoes of 1999 are loud and clear today as Apple’s value eclipses the whole of the FTSE 100 or all of the Russell 2000 index of smaller US shares. Just the biggest five technology companies in America now account for nearly a quarter of the value of the S&P500. The valuations of the top 10 tech stocks are within a point or two of the peak levels reached at the height of the dot.com madness. Buffett has been around long enough to know that this kind of excess does not end well.