Buffett’s Japanese Triumph Amid Economic Turbulence

In a striking display of investment acumen, Warren Buffett’s Berkshire Hathaway is reaping substantial rewards from its Japanese investments even as Japan grapples with severe economic challenges. The island nation currently faces a perfect storm of financial distress: government bonds are experiencing their worst sell-off in decades, with 40-year bond yields surpassing 4% for the first time in thirty years, while the yen continues its precipitous decline. This turmoil stems largely from investor anxiety surrounding Prime Minister Sanae Takaichi’s proposed fiscal stimulus package and tax cuts, which many fear will exacerbate inflation and destabilize markets. For Japanese policymakers, these developments represent a brewing crisis that demands urgent attention, yet paradoxically, this same volatility has proven remarkably beneficial for Berkshire Hathaway’s strategic positions in the country.

The centerpiece of Berkshire’s Japanese success story lies in its substantial investments in the nation’s five major trading houses, collectively known as the sogo shosha: Mitsubishi, Mitsui, Itochu, Marubeni, and Sumitomo. These diversified conglomerates have seen their stock values soar dramatically in recent months, with Marubeni climbing over 30% and Sumitomo surging more than 40% in just the past quarter. During a week of market volatility that saw Japan’s broader Nikkei 225 index decline by approximately 3%, these five trading houses defied the trend, posting gains between 3% and 11%. This remarkable performance reflects a broader six-month pattern where the Nikkei has delivered a 33% return, dramatically outpacing the S&P 500’s more modest 8% increase. Berkshire’s initial $6.5 billion investment in 2019 to acquire 5% stakes in each trading company, followed by additional investments of $7.3 billion to increase those positions, has now blossomed into a portfolio worth approximately $38 billion—representing a staggering $24 billion increase in value.

The brilliance of Buffett’s Japanese investments extends beyond mere capital appreciation to include impressive income generation. Berkshire anticipates collecting roughly $812 million in dividend income from these holdings in 2025, creating a reliable revenue stream that substantially exceeds the $135 million annual interest cost on the yen-denominated debt used to finance the acquisitions. This financing strategy exemplifies Buffett’s characteristic financial ingenuity: borrowing at interest rates below 1% to invest in businesses yielding approximately 4% in dividends creates an inherent profit margin before accounting for any capital appreciation. Such performance provides a welcome bright spot for Berkshire as it navigates a significant leadership transition with Buffett’s planned retirement from his CEO position at year’s end, though he will retain his chairmanship. While Berkshire’s stock has underperformed the broader market this year with an 11% return compared to the S&P 500’s 18%, these Japanese investments demonstrate that the company’s value-oriented approach continues to identify exceptional opportunities globally.

The Japanese trading houses have emerged as safe havens amid the current bond market turbulence for several compelling reasons. Their ownership of hard assets—including energy, metals, and food—provides natural protection against inflation, allowing them to weather and potentially benefit from rising commodity prices. Additionally, the weakening yen creates a favorable currency translation effect for these global businesses, which earn substantial revenue in U.S. dollars while reporting earnings in yen, effectively amplifying their profit figures when converted back to the local currency. This combination of factors represents a dramatic reversal of Japan’s decades-long struggle with deflation, which had previously suppressed asset prices and corporate valuations. As macroeconomic strategist James Bianco observed, the headwind of deflation that long constrained Japanese stocks has finally subsided, creating more favorable conditions for equity appreciation.

Buffett’s interest in the sogo shosha represents an evolution in his investment perspective on Japan. Once skeptical about opportunities in the country, he became convinced of their value after recognizing that these companies were trading significantly below their net asset values during the pandemic’s economic uncertainty. Beyond the compelling valuations, Buffett appears to have recognized philosophical parallels between these trading houses and his own Berkshire Hathaway. Both operate as diversified conglomerates spanning multiple sectors, from commodities and logistics to manufacturing and finance. This structural similarity may have resonated with Buffett, suggesting that he identified not just undervalued assets but kindred business models aligned with his investment philosophy. Despite these promising indicators, the investment still carries risks: if Japan’s interest rate trajectory steepens more than anticipated, the yen could potentially strengthen, diminishing some of the currency translation benefits. Furthermore, as globally integrated businesses, the trading houses remain vulnerable to economic cycles and commodity price fluctuations.

While Berkshire’s Japanese investments have unquestionably proven successful, they represent just 4% of the conglomerate’s massive $1 trillion market capitalization, prompting investors to consider their significance within the broader context of the company’s future. John Boyar, a Berkshire investor and head of Boyar Value Group, suggests that most shareholders are less concerned with individual investment outcomes and more focused on the impending leadership transition to new CEO Greg Abel. Abel has already made his first significant portfolio decision, divesting Berkshire’s 28% stake in Kraft Heinz—worth approximately $7.7 billion and widely considered one of Buffett’s rare investment missteps. The fundamental question for Berkshire investors centers not on whether the Japanese trades will continue generating returns, but whether similar opportunities will emerge in the future and whether the company will maintain its privileged position in markets without Buffett at the helm. As Boyar succinctly observes, “Investors are more focused on whether opportunities like that will appear in the future, based on whether people will still want to do business with Berkshire.” The success in Japan demonstrates Berkshire’s ongoing ability to identify value, but the true test lies in whether this capacity for exceptional investment foresight will endure through its leadership transition.