Warren Buffett Likes Japanese Stocks—Maybe You Should Too
Investor-friendly changes at Japanese companies will boost returns
“This time is different” are the four most dangerous words in investing. But Japanese investors have reasons to be confident that positive changes are afoot in the market.
Japanese stocks have reached their highest level since 1990, when the country’s famous asset bubble was deflating. The Topix index has gained 12% this year, putting it among the best performing markets in the world in 2023. And even renowned investor Warren Buffett has cast his vote of confidence in the market—his investment flagship Berkshire Hathaway BRK.B -0.20%decrease; red down pointing triangle now owns more stocks in Japan than any other country outside of the U.S.
But longtime Japanese investors may wonder if the current rally is different from all the false dawns they have seen in the past three decades. There are indeed grounds for optimism.
For one, the push to improve corporate governance, kick-started by former Prime Minister Shinzo Abe, is bearing fruit. Shareholder activism is rising and the most salient outcome is increased cash returns to shareholders. Total payouts from buybacks and dividends rose to record levels last year and the earnings season currently under way will likely bring another record. For example, Mitsubishi, one of the five Japanese trading companies owned by Berkshire, announced a $2.2 billion buyback last week.
While buybacks are common in the U.S., the increased payouts are a much bigger deal for Japanese companies, which are sitting on a big pile of cash. According to Jefferies, nearly half of Japanese companies have net cash on their balance sheets, versus 22% in the U.S. The more generous payouts have already resulted in a decline in aggregate cash held by nonfinancial companies in the Topix index for the first time since 2011, though they still have around $1 trillion of cash on their balance sheet, Jefferies said.
And Japanese companies are increasingly unwinding cross-shareholdings, or stakes they hold in each other, to boost returns to investors. These cross-shareholdings depress returns on equity and hence valuations. About 54% of companies in the Topix index are trading below book value, compared with just 7% in the S&P 500, according to Jefferies. Earlier this year, the Tokyo stock exchange urged companies that trade below their book values to come up with plans to improve capital returns.
As Japanese companies unwind unproductive cross-ownership webs and boost payouts, investors will continue to grow more willing to pay up for them. This time may indeed be different.