Investors focusing on the Japanese stock market have been holding their breath in anticipation of Warren Buffett's forthcoming annual shareholder letterKnown as the "Oracle of Omaha" and widely regarded as a sage in the investment world, Buffett’s insights are considered invaluableHis reputation as a financial genius has led many to look towards his writings for guidance, especially in light of the troubling trends currently affecting large Japanese trading companies and the broader market's lackluster performance this yearThe Berkshire Hathaway mogul is set to unveil his company’s earnings report on February 22, 2023, coinciding with the release of what many affectionately refer to as his “investment Bible” — the annual shareholder letter.

Since November of last year, the Tokyo Stock Exchange’s wholesale trading index has plummeted by 12%, reflecting a significant lag behind one of Japan's major benchmarks, the Topix IndexInvesting in Japan has become increasingly fraught with uncertainties stemming from new tariffs imposed by the U.S. government, fluctuating energy prices, ongoing inflation in Japan leading to reduced household spending, and pressure on oil prices from American policiesThis troubling backdrop has rendered investors particularly eager to scrutinize Buffett's annual letter for any commentary or insight regarding the state of the Japanese stock market.

This year, the Nikkei 225, which serves as a barometer for Japan’s blue-chip stocks, has also struggled, with a decline of over 3% thus farThis performance starkly contrasts that of the S&P 500 and the MSCI Global Index, suggesting a troubling divergenceThe five prominent trading firms commanding significant weight within the Nikkei 225—Marubeni, Itochu, Sumitomo, Mitsui, and Mitsubishi—are crucial to the market, meaning investors will keenly analyze Buffett's remarks concerning these companies and Berkshire's positions in Japan

Advertisements

Any favorable mentions could potentially signal a resurgence of investment interest in large trading firms.

Buffett's influence on global financial markets is profound, rendering his comments on Japanese equities, major trading companies, or related sectors exceedingly importantSuch insights could serve as a fundamental driving force, helping the Japanese stock market break free from the constrictions of range-bound fluctuations that have defined its previous monthsAnalysts posit that if Buffett reiterates his long-term investment thesis regarding Japan's top trading firms, it could mark a significant turning point for the entire market.

Kohei Onishi, chief strategist at Mitsubishi UFJ Morgan Stanley Securities, noted in a recent report that Buffett’s investments frequently act as a leading indicator of foreign capital inflows. “If Buffett once again affirms the investment value of Japanese stocks, the impact on market sentiment could be exponentially magnified,” he statedLooking back at his previous letters, Buffett has lauded the shareholder return policies of companies like Mitsui and Mitsubishi, asserting they are superior to those of their American counterpartsSuch endorsements have historically driven their stock prices to new heights.

In 2020, Buffett’s unprecedented disclosure of his stakes in Japan's five major trading companies (averaging around 9% ownership) prompted a global re-evaluation of Japan's undervalued equitiesThis influx of foreign capital played a pivotal role in the Nikkei 225 reaching historic highsHowever, those who frequently attend Berkshire Hathaway's annual meetings, such as Bito Financial Service's CEO Mineo Bito, speculate that given Buffett's approach this year hasn't seen drastic adjustments to his holdings, the probability of specific mentions regarding the Japanese stock market in the upcoming letter may be lowHe also indicated that the pressures from U.S. tariffs diminish Buffett's anticipated weight on Japanese investment forecasts.

It should also be noted that Berkshire Hathaway issued its largest yen-denominated bond since 2019 in October of last year, which was interpreted by the market as a sign of increasing commitment to the Japanese stock market.

From a valuation perspective, the five major trading companies currently maintain an average price-to-earnings ratio of approximately 8x, considerably lower than the MSCI Japan Index’s average of 12.5x

Advertisements

Additionally, their dividend yield of around 5% far exceeds that of the MSCI index benchmark, coupled with robust and consistent cash flow generation which highlights their value investment characteristics—elements that align seamlessly with Buffett's long-term investment criteria.

Analysts predict that if Buffett sends a strong signal for increasing his stake, it could ignite a fresh wave of foreign investment flowing into Japan, significantly altering the capital allocation landscapeThe anticipation surrounding Buffett’s annual letter has the potential to catalyze bullish market sentiment, especially should he once again express confidence in Japan's trading companiesSuch affirmation could attract further foreign investments, propelling the Japanese stock market beyond its current stagnant trading range.

Assets referred to as “Japan’s Special Valuation” are primarily represented by the five major trading firms that have received Buffett's backingThese firms, characterized by their solid fundamentals and ongoing initiatives to enhance shareholder returns, are gaining favor among global investors for the 2023-2024 timeframeIn fact, the Nikkei 225 has the potential to surpass levels established during Japan’s historical bubble in 1989, aiming for a peak in 2024. However, the performance since 2025 has underperformed compared to global benchmarksThe term "Special Valuation" indicates that the equities of these firms are significantly undervalued, bolstered by their high dividends, substantial stock buyback programs, and improving corporate governance practices.

Advertisements