Tokyo is well on the way to ending the first half of 2023 as the front-runner among the major stock markets of the world. Shortly before the half-way point, the NIKKEI 225 Index stands more than a fifth above the close for 2022. That means the Japanese benchmark is leaving both its European counterparts and the Wall Street barometer, the S&P 500, trailing in its wake. To say nothing of the China stocks listed in Hong Kong: the Hang Seng sits at the bottom of the table, down just under 2% (see graph). A glance at the trajectory of the NIKKEI 225 shows that the rally in Nippon did not start immediately after the turn of the year. Indeed, the index did not really take off until the end of April. It now stands at its highest level since the summer of 1990. The rally on the Japanese equity market has much to do with two elderly men: Kazuo Ueda and Warren Buffett.
The former is the new head of the Bank of Japan (BoJ). Kazuo Ueda took over this position on 9 April. At the very first meeting of its “Policy Board”, the 71-year-old made it clear that he wanted to continue going down the expansive path of his predecessor, Haruhiko Kuroda. Priority number one is to control interest rates. While Japan’s currency watchdogs are aiming for short-dated yields of -0.1%, they would like to keep the return on 10-year bonds around zero. Nevertheless, the board announced a fundamental review of monetary policy, for which it is giving itself one and half years. The focus is now already on inflation. “While trend inflation is gradually heightening, it will take some time to achieve our inflation target,” Kazuo Ueda stated. Like other central banks the BoJ is striving for price increases of 2%. Obviously the new governor is not yet putting his confidence in rising inflation. After many years of deflationary tendencies, inflation in the Asian country has picked up sharply of late. At any rate, the reiterated monetary policy and the associated weakness of the Japanese yen will certainly have contributed to the Tokyo stock market’s ascent.
Warren Buffett also had a part to play. In April the 92-year-old star investor travelled to Japan. Marking this trip, Berkshire Hathaway announced that it was increasing its exposure to the Far East. Buffett’s investment company upped its stake in five Japanese trading houses. Buffet had first taken a position in the companies, also known as “Sōgō Shōsha”, on his 90th birthday in August 2020. The quintet comprises Itochu, Mitsubishi, Mitsui, Sumitomo and Marubeni. Berkshire Hathaway now holds 7.4% in each of these important concerns. Once again, the “Oracle of Omaha” felt the need to act as a result of valuation. Buffett particularly liked the high dividend yield of the five commercial enterprises, while he reckons the payouts will continue to rise. “I understand in principle what these companies do,” he said in an interview with CNBC about his principles. Since these companies held many different stakes in other businesses, they resembled Berkshire, the stock market guru added.
The “Sōgō Shōsha” play a central role in the history of the Japanese economy. As importers, they have supplied the mountainous archipelago with important raw materials, the palette ranging from energy through metals and foodstuffs to textiles. The companies now record the bulk of their revenue from non-trading activities. The “Sōgō Shōsha” have transformed into conglomerates that are actively involved in a huge range of economic sectors, including real estate, logistics, frozen food and aeronautical engineering. Forward-looking trends such as electro-mobility and renewable energies also feature in the mix. Jesper Koll, Expert Director at financial services provider Monex Group, considers Buffett’s trip a stamp of approval for Japan. The old hand’s presence alone would be sufficient to boost confidence among domestic investors in their home country. “He’s got the track record globally, but now he’s got a very positive track record in investing in Japan,” Koll said in an interview. The latest price movements prove him right: on a one-month view, each of the five Berkshire investments has posted a double-digit percentage rise – putting the quintet as a whole in the top third of the performance rankings for the NIKKEI 225 Index.
Source: Reuters, as at: 12.06.2023. Past performance is not a reliable indicator of future performance.