In his recent annual letter to shareholders, Warren Buffett unveiled a pivotal update concerning Berkshire Hathaway’s stakes in Japan’s prominent trading houses. Initially bound by a 10% ownership cap in each entity, Berkshire has negotiated a new arrangement that allows for increased equity in five major “sogo shosha” firms: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. This shift reflects not only a commitment to long-term partnerships but also an acknowledgment of the potential for enhanced collaboration as market conditions evolve.
Berkshire Hathaway’s entry into these Japanese companies marked a strategic investment decision taken in July 2019, tapping into trading houses that span diverse sectors, similar to Berkshire’s own multifaceted investment approach. By the close of 2024, the market value of these holdings soared to approximately $23.5 billion—substantially higher than the initial investment of $13.8 billion. Buffett pointed out that the management structures and capital allocation strategies of these firms are not only solid but also inspire confidence in shareholders.
An intriguing aspect of Berkshire’s investment strategy has been its handling of currency risk. To finance these investments, Buffett sold Japanese debt and issued yen-denominated bonds. This maneuver not only mitigated the risks associated with currency fluctuations but also positioned Berkshire to reap substantial after-tax gains—reportedly around $2.3 billion in gains from Japanese bonds, partially attributable to a stronger dollar against the yen. This strategy highlights Buffett’s adeptness in navigating foreign exchange complexities, aiming for a currency-neutral position as he thinks about the long-term financial implications of these investments.
Buffett’s outlook for the annual dividend income from these Japanese trading houses is optimistic, projecting around $812 million. Furthermore, he explicitly stated that his designated successor, Greg Abel, along with future leaders, will likely maintain a steadfast investment in Japan for decades. This foresight points to Berkshire’s strategic patience and commitment to sustainable growth, which is crucial in an environment characterized by volatility and uncertainty.
Despite the promising outlook, it’s essential to acknowledge the challenges facing these trading houses. In the past year, companies like Itochu and Marubeni experienced declines exceeding 8%, while Mitsubishi faced a staggering drop of 26%. These figures serve as a reminder that even established businesses can falter in the face of market adversity. However, Buffett’s faith in these firms’ long-term potential underscores his belief in their resilience and the viability of Berkshire Hathaway’s strategic investments in Japan.
Berkshire Hathaway’s strategic pivots regarding its Japanese investments illustrate not only its flexibility but also an enduring ambition to forge robust relationships in international markets. This approach reaffirms Buffett’s confidence in the capability of the trading houses and establishes a foundation for potential future successes, even amidst present challenges.
