In a candid exchange with MBA students at the University of Florida back in 1998, Warren Buffett famously remarked on the paradox of Japan's investment landscape.
“Berkshire Hathaway can borrow for 10 years at 1% in Japan. All I have to do is beat 1% and that's all the money it's going to cost me,” Buffett said. He continued, “ So far, I haven't found anything. Japanese companies earn very low returns on equity. But as long as money is 1%, I'll keep looking.”
More than two decades later, Buffett is now amassing a sizable position in the country while selling off U.S. equities at the same time.
A Time Capsule from 1998
Buffett’s 1998 commentary came amid Japan’s "Lost Decade," a period marked by deflation, stagnant economic growth, and ultra-low interest rates. The Bank of Japan had pushed rates near zero to combat economic malaise, creating a surplus of cheap capital. Yet, Buffett observed that many Japanese companies still delivered “very low returns on equity,” making them unattractive despite the easy money.
His core dilemma was currency risk: unless he wanted to hedge or speculate on the yen, he would need to invest in Japanese assets directly — a step he wasn’t ready to take then.
Buffett’s approach mirrored his mentor Benjamin Graham’s emphasis on intrinsic value and margin of safety. His reluctance wasn’t about rates — it was about the returns on offer.
"If you're in a lousy business for a long time, you're going to get a lousy result,” he later said in the same discussion.
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Fast Forward: Buffett’s Billion-Dollar Pivot
Fast forward to 2025, and Buffett’s stance has turned from wary to enthusiastic. Earlier this year, Berkshire Hathaway (BRK.B) (BRK.A) reported it had raised its holdings in five Japanese trading houses — Itochu (ITOCY), Marubeni (MARUY), Mitsubishi (MTSUY), Mitsui (MITSY), and Sumitomo (SSUMY) — to nearly 10% each. This marks a notable shift in Buffett’s East Asia strategy and reflects a rare example of him going “all in” on a foreign market.
What changed?
The answer lies in a convergence of opportunity, diversification, and Buffett’s strategic use of the very advantage he once dismissed: Japan’s low-cost capital.
Why Now? Timing, Trading Houses, and Trust
Buffett’s investments began in 2019 and were made public in 2020 on his 90th birthday. The five “sogo shosha,” or Japanese trading houses, operate like diversified conglomerates — with interests in everything from energy to food to logistics — much like Berkshire itself.
Their appeal? Robust dividend growth, conservative capital management, and stable cash flow generation. And thanks to Japan’s enduringly low interest rates, Buffett has been able to finance these bets by issuing yen-denominated debt, pocketing the spread between low coupon payments and solid dividend returns.
In his 2024 shareholder letter, Buffett noted that Berkshire had reached agreements with the firms to go beyond the traditional 10% ceiling, signaling long-term commitment. As of year-end 2024, the holdings were valued at $23.5 billion, against a cost basis of just $13.8 billion — a classic Buffett-style bargain.
The Carry Trade Caveat
Buffett’s original caution about currency risk wasn’t unfounded. The carry trade — where investors borrow in low-yielding currencies like the yen to invest in higher-yielding assets — has triggered volatility before. Notably, when U.S. Treasury yields spiked in 2022–2023, a reversal of the yen carry trade caused rapid unwinding and market stress. Short-term collapses across Asian equities and currency markets served as a painful reminder of how quickly sentiment can flip.
