The bustling Tokyo Stock Exchange witnessed a remarkable surge in Mitsubishi Corporation’s stock price on the morning of February 27. This sudden spike not only propelled Mitsubishi but also pushed the entire Tokyo Stock Price Index (TOPIX) past the significant 21,000 markThe catalyst for this remarkable rise was a letter from Warren Buffett, the chairman of Berkshire HathawayIn this letter, he disclosed plans for increasing Berkshire’s stake in Japan’s five major trading houses, thereby highlighting a subtle yet profound shift in global capital flows and Japan’s unique position in the restructuring of global supply chains.
The focus of this capital extravaganza centers around the five major trading companies in Japan: Mitsubishi Corporation, Mitsui & Co., Marubeni Corporation, Sumitomo Corporation, and Itochu CorporationFounded during the Meiji Restoration, these trading giants played a pivotal role in Japan’s post-war economic recovery and now boast extensive networks in global energy, metals, food, and technology industries
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Since Buffett first revealed Berkshire's 5% stake in these companies in 2020, the market value of these holdings has doubled, a testament to both the depreciation of the yen and rising stock pricesRecently, Mitsubishi's market value has exceeded ¥4.5 trillion, while Mitsui’s energy division continues to be reevaluated amidst fluctuating oil prices.
Buffett’s language in the shareholder letter was particularly revealingHe stressed an agreement with the five trading houses to raise the stockholding ceiling from 10% to an even higher threshold, hinting at a long-term commitment to these investments that might last for decadesThis rare long-term promise starkly contrasts with Buffett’s more frequent adjustments to his energy stock holdings in recent yearsAnalysts suggest this decision reflects an astute understanding of the unique opportunities presented by Japan’s ongoing economic transformation.
Japan is currently undergoing its deepest economic transformation in thirty yearsWith the implementation of the “Abenomics 3.0” policy framework, the government plans to invest ¥100 trillion by 2030 in a green energy transitionThe five major trading houses have become central players in this transformative shift, leveraging their positions in the LNG supply chain and renewable energy sectorsFor example, Mitsubishi Corporation has accumulated a total installed capacity of 3.2 GW in global offshore wind projects, while Mitsui & Co. holds a 25% stake in Australia’s largest lithium mine through its subsidiary.
The strategic alignment of these companies with Berkshire's objectives creates a strong synergy
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In the energy transition sector, Berkshire’s BNSF railway is experimenting with hydrogen fuel-cell locomotives, while its MidAmerican Energy subsidiary operates the largest land-based wind portfolio in the United StatesBy collaborating with these Japanese trading houses, Berkshire stands to streamline its operations from resource acquisition to end-use applications throughout the supply chainNotably, Marubeni Corporation recently announced a strategic alliance with the U.S. solid-state battery startup QuantumScape, potentially opening avenues for Berkshire’s investments in the electric vehicle sector.
The institutional context of this capital partnership also merits attentionOver the past five years, Japan has made significant progress in corporate governance reforms, with the Tokyo Stock Exchange Prime Market now requiring listed companies to articulate clear capital return policiesThe dividend yields of the five trading houses generally exceed 3%, with Mitsubishi Corporation maintaining a 15-year streak of increasing dividendsThis financial discipline attracts Berkshire, which favors stable cash flowsMore crucially, the Bank of Japan's persistent Yield Curve Control (YCC) policy keeps ten-year government bond yields well below 0.5%, supporting the valuation of equity assets.
The evolving global geopolitical landscape further accentuates Japan's strategic valueIn the semiconductor supply chain restructuring, Itochu Corporation is collaborating with Taiwan Semiconductor Manufacturing Company to develop advanced packaging technologiesSuch cross-Pacific industrial cooperation aligns impeccably with Berkshire's technology sector strategiesRecently, Apple Inc. announced plans to shift part of its MacBook production lines to Japan, underscoring this trend of reshaping supply chains.
Nevertheless, this capital extravaganza is not without its concerns
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Japan's economy continues to face severe structural challenges, such as a labor-age population decline averaging 1% annually, core inflation rates consistently exceeding the 2% target for eighteen consecutive months, and a slowdown in corporate capital investment growth to 1.2%. According to a recent report from Mizuho Securities, overseas revenues for the five major trading houses account for over 60%, and their exposure to geopolitical risks cannot be overlookedFor instance, Marubeni still has $2.3 billion in assets tied up in energy projects in Russia that remain undivested.
Market reactions to Buffett's decisions have shown notable divergenceIn Tokyo, quantitative hedge funds are beginning to increase their holdings of bullish options on Japanese stock volatility indices, with implied volatility premiums reaching their highest levels in 2023. Conversely, in New York, BlackRock’s global allocation fund has reduced its exposure to Japanese ETFs, arguing that valuations have already fully reflected the positive factorsThis divergence illustrates investors' varied perceptions of Japan’s long-term potential against its short-term risks.
Looking through a historical lens, Buffett’s move into Japan holds meaningful significanceIt reflects anew the practice of value investment principles in emerging markets, and acts as a prescient response to the shifts in the global economic power landscapeAs the U.S. dollar index falls below 95, and the actual effective exchange rate of the yen reaches a 20-year low, Japan is emerging as a refuge for global capital and a new growth engineBerkshire's decision may signal the onset of a new era—one in which Japan, previously regarded as experiencing a "lost thirty years," is re-engaging with the global economic ecosystem in a rejuvenated and dynamic manner.
The curtains of this capital spectacle have merely begun to rise
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