Does Polkshire's long-term holding and adding of Japanese trading companies, with the yen rising, give investors the opportunity to earn from both stocks and foreign exchange?

Berkshire Hathaway ( released its full-year financial report for 2024, in which the legendary investor Warren Buffett ) mentioned in his annual letter to shareholders that Berkshire's performance in 2024 exceeded expectations, with an annualized return of 25.5%. Since July 2019, Berkshire has been acquiring shares of five Japanese trading companies and has committed to long-term holdings. In a Japan that is emerging from its lost three decades and with the Central Bank of Japan continuing to raise interest rates, will investors have the opportunity to profit from both stocks and foreign exchange?

Buffett's deployment of Berkshire funds

Warren Buffett mentioned in his shareholder letter that his company, Berkshire Hathaway, holds many controlled companies with at least 80% ownership, usually 100%. These 189 subsidiaries are similar to publicly traded common stocks but not identical, with a total value of trillions of dollars, including some rare gems, many good but not outstanding businesses, and some disappointments.

In addition, Berkshire Hathaway holds small stakes in some well-known large enterprises, with these equity investments mainly concentrated in US companies, many of which also have significant international operations. Such as Apple, American Express, Coca-Cola, and Moody's. Buffett stated that holding small stakes in these well-known large enterprises does not require involvement in operations, and the investment return is very high. As of the end of the year, Berkshire Hathaway's total market value of holdings in these companies is $272 billion.

For tradable stocks, changing strategies is relatively easy, but due to Berkshire's huge size, this option's flexibility is limited. In contrast, for holding companies, Berkshire can directly influence decision-making, but the flexibility to handle mistakes is lower, and holding companies are rarely sold unless they face unsolvable problems.

In addition, Buffett praised the miracle of capitalism in driving sustained output growth in society, and said that the United States has shown unprecedented progress in its 235-year history. Berkshire shareholders have participated in this miracle by choosing to reinvest dividends rather than consume (, as Berkshire has only distributed dividends once in many years ), thereby harnessing the magic of compounding for sustained corporate growth.

Berkshire Hathaway delivered an impressive annualized return of 19.9% from 1965 to 2024, while the S&P 500 index had an annualized return of 10.4% during the same period.

Berkshire intends to hold Japanese trading companies for the long term

Since July 2019, Berkshire Hathaway has acquired shares in five Japanese companies, namely ITOCHU, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

These five companies have previously attracted Berkshire's attention with low stock prices, while they have diversified businesses, excellent capital deployment, and more conservative senior executive compensation policies, earning praise from Buffett and Berkshire management.

Berkshire intends to hold these companies for the long term and has committed to supporting their boards. The initial agreement is to hold no more than 10% of each company's shares, but over time, the Japanese trading companies have agreed to "moderately" relax the limit, so this shareholding ratio may slightly increase.

By the end of 2024, Berkshire Hathaway's total investment cost in these five companies was $13.8 billion, with a market value of $23.5 billion.

Foreign exchange risk is difficult to manage, Berkshire issued yen bonds to buy stocks

Because investing in Japanese stocks requires investing in Japanese yen, but Buffett has mentioned before that predicting exchange rates is very difficult, and Berkshire Hathaway is not good at predicting the market prices of currencies. Therefore, Berkshire Hathaway provides funds for most of its positions in Japan by issuing yen bonds. These bonds are very popular in Japan, and Japan's long-term negative interest rate policy has greatly reduced Berkshire Hathaway's borrowing costs.

Berkshire will continue to increase its borrowings denominated in Japanese yen to achieve a currency-neutral effect. Although Buffett and Greg have no views on the future foreign exchange trends, they are still satisfied with the current financial strategy and expect annual dividend income in 2025 to be approximately 812 million US dollars, with interest costs on the Japanese yen borrowings amounting to about 135 million US dollars.

However, according to GAAP rules, Buffett must regularly recognize the exchange gains and losses generated by Berkshire's borrowing in Japanese yen in the income. As of the end of last year, Berkshire has recorded a $2.3 billion after-tax income due to the strengthening of the US dollar and the depreciation of the Japanese yen, of which $0.85 billion occurred in 2024.

The depreciation of the Japanese yen has brought profits to Berkshire Hathaway

The chart below shows the trend of the Japanese stock market from July 2019 to the present. Although the Nikkei 225 index has risen by 84% so far, the Japanese yen has depreciated by 37% against the US dollar. The purple line represents the USD/JPY trend, with an upward trend indicating the depreciation of the Japanese yen. If you simply invest in Japanese stocks with US dollars, the depreciation of the exchange rate will eat up more than a third of the gains. It can be seen that Berkshire Hathaway's method of issuing Japanese bonds to buy stocks is very clever.

Japan has initiated a rate hike cycle, do investors have the opportunity to profit from stocks and foreign exchange?

However, Japan seems to have emerged from its lost three decades. Recently, Japan's inflation accelerated beyond expectations, rising at the fastest pace since the summer of 2023, and the market expects the BOJ(BOJ) to possibly raise interest rates again in July. The USD/JPY(USD/JPY) exchange rate fell below the 150 level, reaching its lowest point this year. There is a chance for the Japanese yen to continue to appreciate, allowing Japanese stock investors to profit from both stocks and foreign exchange.

(Japan's inflation continues to rise, and the Bank of Japan may raise interest rates again in July, causing the US dollar to fall below 150).

Although the Japanese stock market has been in a consolidation phase in the past half year, the recent strength of the Japanese yen has brought pressure to exporters. So far this year, the Nikkei 225 index has fallen by about 2.93%, while the MSCI Asia Pacific index has risen by about 4.6%. However, Berkshire Hathaway has stated that it will hold Japanese stocks for 'decades' and is exploring other ways to cooperate with these companies in the future, demonstrating strong confidence in Japanese corporations.

Retail investors may not be able to issue yen bonds like Berkshire Hathaway, but the appreciation of the yen is also an opportunity for retail investors. For Taiwanese investors, investing in Japanese stocks requires exchanging Taiwanese dollars for yen first, and then exchanging yen back to Taiwanese dollars when selling stocks. If the yen appreciates, there is a chance for a double gain in stocks and forex.

The USD/JPY exchange rate has dropped below the 150 level, and the next important support will be around the long-term neckline at 140. Although a sharp rise in the Japanese yen may pose risks of arbitrage liquidation, the risk of long-term depreciation of the yen has greatly reduced. The future is more likely to see a gradual rise.

Multiple delegated accounts can directly buy Japanese stocks

As for the way to buy Japanese stocks, in addition to the common method of buying Japanese funds through banks, investors who research individual stocks can also directly buy Japanese stocks through a dual-agency approach.

Taiwanese investors can directly open a duplicate entrusted account through securities firms. If investors already have a Taiwan stock securities account, most of them can directly open a duplicate entrusted account on the securities firm platform. However, due to the circular storage system of duplicate entrusted transactions, investors need to ensure that there are sufficient delivery funds in the agreed delivery account, including the transaction price, fees, and various expenses, in order to place orders.

The delivery account can choose a foreign currency account or a New Taiwan dollar account. If you are an investor who does not trade often, the author suggests starting with a New Taiwan dollar account for transactions to avoid the process of exchanging currency and calculating handling fees. However, for investors who regularly trade in US stocks or other foreign stock markets, they can exchange currency in the account when the exchange rate is low, which may save some costs on the exchange rate difference.

Also, it is worth noting that multiple delegated transactions usually have a minimum fee limit. For example, the commission for daily stock transactions at Cathay Securities is 0.5%, with a minimum charge of 3,000 yen per transaction. In other words, if the order amount does not exceed 600,000 yen, a fee of 3,000 yen will still be charged. Therefore, it seems that multiple delegated transactions of Japanese stocks are suitable for long-term investors with larger transaction amounts. Those who only want to make small investments may consider related funds in Japan.

Many Taiwan securities firms offer multiple delegated trading services for US stocks, Japanese stocks, Hong Kong stocks, and Shanghai-Hong Kong Stock Connect. Opening an account allows investors to simultaneously invest in multiple international markets, making it a convenient investment channel for those who do not need to trade frequently.

(How to invest in overseas Bitcoin reserve strategy companies? Is it better to open an overseas securities account or a discretionary account?)

This article is a personal opinion, not investment advice, please DYOR

This article Berkshire Hathaway has long held and increased its holdings in Japanese trading companies. Will the yen appreciate, giving investors the opportunity to earn from both stocks and foreign exchange? First appeared on ChainNews ABMedia.