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At this year’s Berkshire Hathaway shareholder meeting, investment guru Warren Buffett publicly stated that he would “never sell” the stocks of Japan’s five major trading companies for the next 50 years, and he might even hold them indefinitely. His successor, Abel, also mentioned that he would hold regular meetings with these five companies, aiming to establish a long-term and solid partnership with them. This has sparked a new bull market in Japanese stocks. What exactly is the appeal of Japanese companies? Is there still potential for Japanese stock funds and ETFs in the future?

Spotlight of Japan Trading companies

“Trading companies” are a unique type of business in Japan, originally focused on trade and then expanding into other industries based on their existing operations. The five major trading companies have a vast range of business activities, covering everything from B2B sectors like metals, energy, machinery, transportation, chemicals, and infrastructure, to B2C sectors such as retail, healthcare, internet, and finance. These trading companies are involved in nearly every aspect of Japanese people’s daily lives, making their business model unparalleled globally. They can be considered the “invisible backbone” of the Japanese economy, controlling its economic lifeline. Recognizing the unique global business model and stable growth potential of Japanese trading companies, investment mogul Warren Buffett’s diversified holding company, Berkshire Hathaway, disclosed in August 2020 that it had invested in shares of the five major trading companies: Mitsubishi Corporation, Mitsui & Co., Marubeni Corporation, Sumitomo Corporation, and Itochu Corporation. Since Buffett began investing, the stock prices of these five trading companies have soared, making it one of Buffett’s most successful investments in recent years!

The five major trading companies generally possess multiple competitive advantages, including a global resource layout, vertical integration of the supply chain, high dividends, low price-to-book ratios, and resilience against economic cycles. When Buffett first invested in 2020, the price-to-book ratios (PBR) of these companies were only between 0.5 and 0.7 times, with dividend yields typically exceeding 5%. Even after years of rising stock prices, the price-to-book ratios of these companies remained lower than the overall Japanese stock market. Furthermore, as of last year, the dividends from these companies were still quite generous, with an average of up to 46% of profits allocated for shareholder dividends, far exceeding the 31% of S&P 500 companies in the U.S. It is expected that the dividend yields over the next 12 months will still exceed 3.5%, significantly surpassing the anticipated annual average of 2.7% for the Tokyo Stock Exchange Index this year.

Since first investing in 2020, Buffett has increased his stake to nearly 10%, demonstrating his long-term faith in the Japanese market and the five major trading companies through his actions. Additionally, investment demand from Japan’s individual savings accounts (NISA) has expanded from traditional popular targets, such as Nippon Telegraph and Telephone Corporation, Japan Tobacco, and Mitsubishi UFJ Financial Group, to include trading companies. Even though global trade uncertainty surged after Trump announced “liberation day” tariffs on April 2, causing a significant drop in Japanese stocks at one point, the stock prices of Japanese trading companies have consistently outperformed the market.

Governance Reforms to Boost Valuations

In addition to Buffett’s investment in the five major trading companies and the foreign capital’s bullish effect on Japan, the Japanese stock exchange has been actively promoting corporate governance reforms in recent years. The financial health of companies has significantly improved, with over 50% of Japanese companies now having positive net cash flow, far surpassing American companies. At the same time, the cross-shareholding ratio among Japanese companies has greatly decreased, and the participation of external investors has increased. Companies are actively implementing stock buybacks and dividend distributions, which enhance the return on equity (ROE) and price-to-book ratio (PBR), contributing to long-term stock performance and significantly boosting corporate value. The Japanese government is promoting the new NISA system to expand investment limits and tax-exempt periods, encouraging domestic investors to actively participate in the investment market. Long-term capital inflows from pension funds and foreign institutional investors provide strong financial momentum for Japanese stocks, allowing them to briefly surpass the 40,000-point mark and reach a nearly 30-year high.

Headwind of Japan’s Economy

Despite significant improvements in the structure of Japanese companies and an increase in foreign investment, there are still concerns about Japan’s recent economy. Due to a decrease in exports, Japan’s GDP fell by 0.2% in the first quarter compared to the previous quarter. In May, the economic sentiment index also turned to “deterioration” for the first time since July 2020, indicating an increased risk of economic recession. Additionally, the U.S. tariff policy has intensified downward pressure, leading to the largest decline in real wages in 20 months, with a year-on-year decrease of 2.9%, further hampering economic recovery.

Moreover, Japan’s core consumer price index (CPI) saw a year-on-year increase of 3.7% in May, reaching a new high since January 2023. This figure not only exceeded market expectations but also surpassed April’s 3.5%, reflecting a continuous rise in the cost of living. Furthermore, due to supply chain disruptions causing a shortage of rice, rice prices surged by 101% year-on-year in May, continuing to exceed April’s 98% increase, marking the largest rise in half a century. Electricity prices rose by 11.3%, and gas prices increased by 5.4%. The soaring rice prices and inflation continuing to outpace wage growth have clearly suppressed consumer spending. Public dissatisfaction with Prime Minister Kishida’s government has sharply increased, and his approval rating has dropped to a new low since he took office in October last year. Although the Bank of Japan is still maintaining interest rates at 0.5%, the pressure to raise rates in the future has significantly increased. However, despite the possibility of a technical recession in the first half of the year, the Cabinet Office and the IMF remain optimistic, predicting that Japan’s GDP will grow by 0.4% to 1.1% in the fiscal year 2025.

Dilemma of Japan

The Japanese stock market has now fully recovered from the losses due to the equivalent tariffs, but whether it can reach new highs in the future largely hinges on the tricky U.S.-Japan tariff issue. Japan has been actively working to reach an agreement with the United States that includes auto tariffs. However, the U.S. government emphasizes the need for significant concessions on auto tariffs, even proposing a voluntary export restraint policy to limit Japanese car exports as a pressure tactic. The Japanese negotiating team insists on not accepting high tariffs as a bottom line, especially refusing to sacrifice agricultural interests for automotive benefits. After several rounds of negotiations without success, the U.S. unilaterally announced it would impose a 25% tariff on Japan, which is higher than the 24% rate announced in early April. From the content of the letter Trump sent to Japan, it expresses strong dissatisfaction with the trade deficit and ignores Japan’s strong demand for a reconsideration of the tariff measures.

The reason Japan is unwilling to make concessions and has not been able to finalize a trade agreement with the U.S. in a timely manner is primarily due to the upcoming House of Councillors election on July 20. The ruling Liberal Democratic Party, led by Prime Minister Shigeru Ishiba, is currently facing a tough election situation. Inflation and economic performance are the main concerns for domestic voters. If Japan makes excessive concessions to the U.S. in the trade agreement, it risks losing public support and voter backing. Additionally, agriculture has long been a crucial voter base for the Liberal Democratic Party, and opening the rice market could destabilize local election prospects, directly affecting the balance of factions within the party. Therefore, the outcome of the House of Councillors election will be a key variable influencing the direction of U.S.-Japan negotiations!

Last year, Japan’s total export trade to the United States exceeded 21 trillion yen, making it the highest in the world. If tariffs remain at 25%, along with the already implemented tariffs on automobiles, steel, and aluminum, it is expected to have a significant impact on the Japanese economy. The market believes that in the worst-case scenario, this could lead to a reduction in Japan’s GDP by 0.8% or more. Additionally, the new tariffs will also affect many domestic industries such as machinery and food, negatively impacting corporate profits, wages, and employment.

Japan Equity Funds Performance Analysis

According to Lipper Statistics, as of July 11, the Nikkei 225 index has decreased by 0.8% this year. Currently, there are 35 registered Japanese equity funds available for sale in the domestic market (including 5 ETFs), with an average return of -1.9% year-to-date. However, many Japanese stock funds have performed impressively this year, primarily influenced by the fund managers’ stock selection and the depreciation of the Japanese yen against the New Taiwan Dollar. Over the past year, Japanese stock funds have averaged a performance of 14.7%, and their long-term performance remains relatively strong! Looking ahead, if Japan can negotiate more favorable tariffs with the U.S. before the August 1 deadline, along with a boost in domestic industries such as utilities, finance, construction, and technology services, the Osaka World Expo could also stimulate demand across various sectors like technology, tourism, and transportation. Additionally, sectors such as semiconductors and factory automation (FA) have long-term growth potential, suggesting that Japanese stock funds still have promising prospects.

Table 1: Outperforming Equity Japan Funds RFS in Taiwan

(Click on image to enlarge)

Source：LSEG Lipper, as of 2025/7/18, in TWD

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