Buffett bets on Japan just as Abe bows out

Japan PM Shinzo Abe resigns

In what may go down as a pivotal week in the modern history of Japan, the legendary Warren Buffett’s Berkshire Hathaway investment vehicle confirmed that it had spent the last 12 months acquiring minority stakes in each of the Asian country’s five trading companies. Its announcement came just days after Prime Minister Shinzo Abe stepped down, ostensibly on the grounds of ill health, but also under persistent criticism of his much-vaunted Abenomics policy.
It remains to be seen if Buffet’s respective acquisition of just over 5% shareholdings in the Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo corporations marks the beginning of a revival for Japan’s ailing economy, but its timing so soon after Abe’s resignation has placed not just the outgoing PM’s track record under scrutiny, but the long-term prospects for the Japanese economy as well.
Abe and his conservative Liberal Democratic Party (LDP) swept to power in 2012, pledging to bring 20 years of stagnation to an end and promptly introduced  Abenonomics, a three-pronged strategy that relied on a combination of large-scale monetary easing, fiscal spending and structural reforms to turn Japan’s fiscal fortunes around.
It started well enough, with the Bank of Japan’s ‘bazooka’ stimulus programme lifting business sentiment and, by weakening the yen, giving exporters windfall profits that trickled down to wages and new jobs. Corporate governance reforms also succeeded in attracting FDI and foreign ownership of Japan’s listed stocks; but what Abenomics was ultimately unable to do was to reshape an economy that remains constrained by low productivity, a rapidly ageing population, a rigid labour market and an inbuilt aversion to risk.
“Abenomics has singularly failed to deliver Japan the domestic conditions that would spark higher growth beyond more reliance on external demand,” says Brian Kelly, Managing Partner at Asian Century Quest. In the short term, this has been something of a blessing in disguise, as companies’ reluctance to invest for future growth has left them with substantial cash piles that has given many of them the liquidity to see them through the current pandemic. Many analysts and observers fear that that reluctance will remain long after COVID-19 is finally bought under total control and that it will continue to stifle Japan’s long-term growth. The pandemic has had a devastating effect on several sectors which rely on that external demand, including inbound tourism.
sogo sosha Japanese trading houseIn July, core consumer prices remained unchanged, leaving the economy teetering on the verge of deflation, so Buffet’s confidence would look counter-intuitive at best were it not for Berkshire Hathaway’s insistence that they are in it for the long haul. It may even, it says, look to increase its holdings in any one of the five trading companies up to a maximum of 9.9%, depending on price.The companies (sogo shosha) are conglomerates that import everything from energy and metals to food and textiles and, perhaps a key factor behind Buffet’s interest, derive around 20% of their profits from their tradings in resource-related operations and cyclical commodities which. Led  by metals such as copper and gold, these have rebounded sharply in recent months. In recent years they have also become increasingly involved in  private equity and venture capital, which may help provide Berkshire Hathaway with the return on investment that has been the 90-year-old Buffett’s hallmark over the years.