Bank of America on Warren Buffett’s Japan investments

Japan’s trading houses—known as sogo shosha—have recently had an influx of interest following a visit from the Berkshire Hathaway owner earlier this year, who has been upping his stakes in the country’s largest trading houses for the past couple of years.

Buffett purchased a 5% stake in Itochu, Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., and Marubeni in August 2020.

In November 2022, Reuters reported this had been upped again, with a regulatory filing showing Berkshire now owns 6.59% in Mitsubishi, 6.62% in Mitsui, 6.21% in Itochu, 6.75% in Marubeni, and 6.57% in Sumitomo.

However, Bank of America—also one of Buffett’s most prized investments—has issued a note of caution to counter the renewed interest in the geography.

Strategists Shusuke Yamada and Tony Lin wrote that calls to ‘Buy Japan’—purchasing Japanese stocks and currency—are “premature”.

In a note released earlier this week and seen by Fortune, the pair explained: “In our view, the Japan trade for 2023 is to buy Japan equities, funded by JPY (“yen carry trade”).”

A carry trade is an investment strategy which sees firms and individuals borrowing at a low interest rate and re investing it in an asset with a higher rate of return.

“We remain bearish on JPY in 2023 despite its cheapness for two reasons—a persistent foreign direct investment (FDI) deficit and a potential rise of yen-carry trade,” Yamada and Yin wrote.

Japan’s outward investment

There are some positive catalysts for the Japanese yen, the pair pointed out, in the form of a recovery of the nation’s current account surplus—buoyed by lower oil prices and the return of inbound tourists as pandemic restrictions continue to wane.

Yet the pair said these positives are not “enough to correct the yen’s undervaluation as Japan’s FDI deficit remains wide and the BoJ (Bank of Japan) does not seem willing to raise interest rate in the near term.”

Japan’s FDI deficit has arisen out of the fact that Japanese companies are continuing to engage in outbound investments into other territories, at a rate outpacing inbound foreign investment from the likes of Buffett.

The latest data from the Japanese Ministry of Finance shows that equity purchases into the country are already beginning to drop off—falling from 2.4…