Warren Buffett's Berkshire Hathaway recently revealed that it owns 5% of all five of Japan's biggest trading houses: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. The stakes were worth a combined $6.9 billion at the close of trading on Wednesday.
The surprise vote of confidence is a game changer for Japanese stocks, according to John Vail, the chief global strategist of Nikko Asset Management.
"The fact that the world's most famous investor has committed to such large sums has ramifications for both domestic and international perceptions about Japanese equities," he said in an upcoming research note titled "The Buffett Fillip" that was viewed by Business Insider.
Buffett's backing signals that he trusts Japanese companies' accounting, governance, and business acumen, Vail said. It also underscores their depressed valuations, he added, and suggests the Berkshire chief "can hardly find anything worth buying in the US."
Dividends were also likely a "crucial" factor in Buffett's decision to invest, Vail told Business Insider. The five stocks have offered a roughly 6% yield in recent quarters, he said in the note, describing that as "an extraordinarily high return globally for a solid sector in a country with a solid currency."
Japan's economic downturn and depressed commodity prices had raised the prospect of dividend cuts, but Buffett's show of support reduces that risk, as the trading houses will probably "compete among each other to retain Buffett's praise," Vail said.
Overall, Buffett's purchases have highlighted the appeal of Japanese stocks and promise to counter "excessive investor pessimism" toward them, Vail told Business Insider. The Berkshire chief's endorsement "should inspire investors in Japanese equities to a significant degree," he said in the note.
"It likely marks a true turning point for Japanese equities," Vail added. "No one will be able to speak quite as dourly, as the retort should typically be: 'But Buffett Disagrees.'"
Japan has fewer issues than many believe
Vail addressed several lingering concerns about Japanese stocks in the note, including the country's uncompetitive economy and ageing population, barriers to foreign investors, and reliance on automobiles and other capital-intensive industries.
He said Japan has held its own against the US and Europe this year, and corporate profit margins have widened because of better governance, technology, efficiency, and ability to tap into Chinese demand. Meanwhile, Buffett's investment proves overseas investors can build large stakes in Japanese companies, he added.
Companies are also diversifying their supply chains after being burnt by their overreliance on China during the pandemic — a trend that promises to fuel demand for Japanese businesses such as microchip-fabrication plants, Vail said.
Vehicle sales are also bouncing back, and Japan is the global leader in electric hybrid vehicles, with cars such as the Toyota Prius, he added.
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