Japanese Stocks Are Finally Hot Again

Cutout paper illustration representing scheme and Stocks inscription

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Warren Buffett has done it again, racking up another profitable investment in the span of a few years.

This time, he went across the Pacific Ocean to the stock bargain basement known as Japan. His surprise bet on five Japanese companies has nearly tripled in size—to $17 billion—in under three years. The surge partially reflects the buying of more shares, but also the companies’ stock prices soaring to multi-decade highs.

Buffett’s Berkshire Hathaway (BRK.B) conglomerate disclosed 5% stakes in five Japanese trading houses—Itochu (ITOCY), Marubeni (MARUY), Mitsubishi (MSBHF), Mitsui (MITSY), and Sumitomo (SSUMY)—in August 2020. Berkshire has ramped up those positions to about 7.4% across the board, Buffett disclosed in May.

Since Buffett’s original purchase—at what he called “ridiculously” cheap valuations—the five stocks have gained on average nearly 185%!

Here’s why – and how you can still get in…

Why Japanese Stocks Are Soaring

These five stocks are representative of what is going on with Japanese stocks as a whole recently: Japan’s Nikkei 225 index has jumped nearly 30% this year, far outstripping the gains for the S&P 500 (14.25%). The Nikkei has not been this high for more than 33 years!

Valuations are cheap in Japan and investors are discovering that it has a lot of high-quality technology and manufacturing firms, particularly in the semiconductor sector. For example, Advantest (ATEYY) is a leading manufacturer of automatic test equipment for the semiconductor industry. Its stock is up 150% over the past year and 118% year-to-date.

The reshaping of global supply chains away from China is another plus. This trend could unleash a wave of foreign acquisitions of Japanese manufacturers and facilities. At the least, it is igniting interest in those companies’ stocks.

In addition, authorities at the Tokyo Stock Exchange (TSE) have also been pushing hard on Japan’s many capital-inefficient companies, whose price-to-book (P/B) ratio is below 1. They either must shape up or face financial penalties.

Keep in mind that, at the time the TSE began its push earlier in 2023, more than half of all TSE stocks were trading below their book value! The reason was often too high a reserve of cash.

Though the penalties are years away, companies are already starting to follow the new script. Buyback announcements in the 2022 fiscal year hit an all-time record. Cash dividend payouts from those aforementioned cash piles are also at a record. In simple terms, these TSE reforms are having a big impact by changing cultural expectations (becoming more shareholder-friendly) of Japanese corporate management.

And with only 20% of first-quarter buyback announcements coming from companies with a P/B ratio below 1, there is much more to come from Japanese companies and their stocks.

At the annual Berkshire Hathaway shareholder meeting on May 6, Buffett told his audience that he was “not done” with his search for more investable targets in Japan—and I can see why. There are still very cheap valuations there, not to mention Japan’s low stock-index weightings to sectors that have been struggling globally of late, such as banks. The benchmark Topix index is trading at a level of just 16 times its earnings over the previous year. That compares to 20 times for the S&P 500 index and about 18 times for the MSCI World Index.

Japan ETF: DXJ

The rally in Japan has finally succeeded in garnering attention from U.S. retail investors away from AI.

The WisdomTree Japan Hedged Equity Fund (DXJ) drew an inflow of $240 million in May, the largest since October 2017. It also pulled in roughly $1 billion in June, with the bulk of that coming from a $787 million cash influx last week. That was the biggest weekly inflow in over five years! The fund has gained almost 8% month to date.

Year-to-date, EWJ has raked in $1.8 billion in net flows, which is the most among Japan-focused ETFs traded in the U.S.

Here are some of the top 10 stock positions and the year-to-date gains: Toyota Motors (TM), +19.2%; Mitsubishi (MSBHF), +52.26%; Mitsui (MITSY), +34.11%; Tokyo Electron (TOELY), +45.5%; and Shin-Etsu Chemical (SHECY), +42%.

And with this being a hedge fund, you do not have to worry about the value of the Japanese yen affecting your investment. It has a decent yield as well, with the SEC 30-day yield at 2.6%.

DXJ is up 30.25% over the past year, with most of the gain coming in 2023 – up 28.65% year-to-date. It is a buy in the $77 to $87 range.

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