On February 25th, Tokyo's stock market experienced a significant uptick, often referred to as the “Buffett Effect,” as the shares of the five major Japanese trading firms saw a collective riseMitsubishi Corporation surged by more than 8%, marking its largest single-day increase in nearly three yearsOther key players, including Marubeni Corporation, Mitsui & Co., Itochu Corporation, and Sumitomo Corporation, also witnessed substantial gainsThis rally was ignited by the notable announcement made by the 94-year-old investment mogul Warren Buffett in his recent letter to shareholders, where he indicated an intention to indefinitely increase his holdings in Japanese trading firms and revealed that he had already surpassed the 10% ownership threshold.

Since Buffett’s initial foray into the Japanese market in 2020, shares of these five trading houses have collectively appreciated between 80% and 230%, becoming some of the standout assets in his investment portfolioThis long-term commitment to Japanese trading companies begs the question: what strategic logic underpins Buffett’s Japan gamble, which has spanned six years?

Investment Logic

The investment by Buffett’s conglomerate, Berkshire Hathaway, in Japan's five major trading companies began in August 2020. On his 90th birthday, Buffett astounded the market by announcing a near $30 billion acquisition of 5% stakes in Itochu, Marubeni, Mitsubishi, Mitsui, and SumitomoThese trading firms operate the vital veins of the Japanese economy: Mitsubishi controls one-fifth of the global liquefied natural gas trade, Sumitomo manages 2 million hectares of farmland in Southeast Asia, and Marubeni is recognized as the world’s largest beef traderThis integrated supply chain—from oil fields to dinner tables—enabled the firms to maintain an average return on equity (ROE) of 12% even amidst the global commodity fluctuations projected for 2024.

According to Goldman Sachs, these five trading houses collectively possess overseas assets valued at around $380 billion, which is equivalent to 68% of Japan's foreign exchange reserves. “They are not just companies; they extend the essence of national sovereignty,” praised Takahide Kiuchi, chief economist at Nomura Securities.

When Buffett made his initial investment, the shares of these firms were languishing due to trade tensions between Japan and South Korea, along with the impacts of the pandemic, rendering them undervalued from his perspective

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By the end of 2024, these firms still boasted an average price-to-book ratio of below 1.5, while their dividend yields were notably high, ranging from 3% to 5%—significantly outperforming U.STreasury yields at the timeFor instance, Mitsubishi Corporation saw consistent annual growth in free cash flow, with its 2022 net profit reaching a historic high of 1.18 trillion yen.

Hidemi Kakegawa, an analyst at Tokai Tokyo Securities, notes that these trading firms are diversifying their business portfolios by expanding into non-resource sectors like retail and digital infrastructure, which has increased their profit stability. “This is what Buffett values as their ‘economic moat’,” Kakegawa explains.

In Buffett’s 2025 letter to shareholders, he elaborated on the operational success of these companies, likening their business model to that of Berkshire Hathaway’sJapan, as a resource-scarce nation, relies heavily on trade—over 90% of its GDPThis has birthed a unique “trading company model,” where profits are earned through global resource integration and supply chain managementA sentiment shared by the president of Sumitomo Corporation suggests that “as long as Japan exists, trade will never cease.” This business strategy aligns closely with Berkshire Hathaway's hallmark of “holding plus operating.”

More importantly, Japan’s recent corporate governance reforms have delivered institutional benefits to BuffettIn 2024, Japan’s corporate stock buybacks reached a staggering 16.8 trillion yen, while the five major trading companies allocated 46% of their profits for dividendsIn stark contrast to the S&P 500 companies, which average a dividend payout of only 31%, Buffett lauded these efforts in his correspondence: “This is a perfect specimen of capitalism—where management and shareholder interests are highly aligned.”

Long-term Investment in Japan

Fast forward six years, and Berkshire Hathaway’s investment has appreciated by nearly 70%. By the end of 2024, the total investment cost for Berkshire Hathaway in these five firms was approximately $13.8 billion, while their market value had soared to $23.5 billion

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Crucially, Buffett achieved a “currency-neutral” position by issuing yen-denominated bonds, fully minimizing any risks associated with currency fluctuations.

Additionally, Buffett revealed that these trading houses have agreed to “moderately relax” the previous 10% cap on ownership, paving the way for Berkshire Hathaway to further increase its stakeHe stressed that these firms are committed to “raising dividends at the right time and repurchasing stocks judiciously,” with management compensation remaining “far less aggressive” than their American counterparts.

Analysts project that if Berkshire Hathaway raises its stake to 9.9%, the total investment could exceed $40 billionBuffett has articulated that his investment in Japan is a long-term commitment, with expectations of holding these assets for 10 to 20 yearsHe projects that by 2025, the dividend income from Japanese investments could total around $812 million, while interest payments on yen-denominated debt would be a modest $135 millionThis strategic long-term approach not only secures a steady cash flow for the company but also instills lasting confidence in the Japanese market.

Goldman Sachs analysts suggest that Buffett's investment strategy goes beyond mere financial return; it reflects Japan’s strategic position in the global economyJapanese trading firms play a pivotal role in global supply chains, particularly regarding the trading of resources and intermediate goodsThey anticipate that as the global economy recovers, the performance of Japanese trading firms will continue its robust growth trajectory.

Nick Samouilhan, Managing Director and Co-Head of Multi-Asset at Wellington Management, remarked that Japan is undergoing structural reforms that have been in progress for some timeHe also noted that inflation has begun to rise, allowing businesses to profit from this change, suggesting that this will be a long-term trend. "In a reasonable time frame, considering Japan's overall economic situation and the ongoing reforms in its financial market, Japanese stocks are very attractive,” he affirmed.

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