At a time when the market is aggressively shorting the yen, Warren Buffett's investment company Berkshire Hathaway is preparing to issue a new round of yen bonds, which is also the company's first issuance of yen bonds after the Bank of Japan's interest rate normalization, which is seen by the market as a precursor to its further investment in Japan. As for the consideration of the stock god, his late gold partner Munger once said, "Buffett raised yen to invest in Japanese trading companies, and the logic is to borrow money at low interest rates to buy high-dividend yield assets."
A new round of yen bonds was issued
Berkshire Hathaway plans to issue yen bonds globally again, as reported by Bloomberg on April 9. Bloomberg, citing a person familiar with the matter, reported that Berkshire Hathaway has commissioned a number of banks to assist in the issuance of the bond, and the timing of the issuance depends on market conditions and "may be in the near future."
Atsuko Ishitani, a strategist at Japan's Daiwa Securities, said: "Berkshire Hathaway's plan to issue yen bonds has raised speculation about whether the company will buy more shares of trading companies." ”
Affected by this news, the share prices of Japan's five major trading companies favored by Buffett (Itochu Corporation, Marubeni, Mitsubishi, Mitsui and Sumitomo) rose in response, pulling up Japanese stocks, and the Nikkei 225 Index closed up 1.08% at 39773.13 points, up for two consecutive days, and Mitsubishi Corporation and Mitsui & Co. rose more than 3%.
The timing of Berkshire Hathaway's issuance of yen bonds is a cause for concern. Shortly before that, on 19 March, the Bank of Japan (BOJ) announced that it would raise its policy rate from minus 0.1% to a range of 0 to 0.1%, while deciding to end its yield curve control policy and halt purchases of exchange-traded funds and REITs. This is the first time in 17 years that the Bank of Japan has raised interest rates, and the eight-year era of negative interest rates has come to an end.
Berkshire Hathaway also became the first major non-financial overseas bond issuer to issue yen bonds in the Japanese market after the Bank of Japan lifted its negative interest rate policy. The company's last issuance of yen bonds was in November last year, totaling $800 million.
It is worth noting that the net sale of spot and futures in Japanese stocks by foreign investors at the end of March hit a six-month high. Foreign investors sold a net 1.18 trillion yen ($7.8 billion) of spot and futures in stocks in the week ended March 29, the highest level since the last week of last September, according to Japan Exchange Group.
Lock in low interest rates
According to some analysts, Berkshire's issuance of yen bonds this time is likely to lock in the current lower interest rate and raise funds at a lower cost. While Japan has ended negative interest rates, companies such as Berkshire Hathaway could face higher funding costs if the Bank of Japan continues to raise interest rates.
Chen Jia, an independent international strategy researcher, told Beijing Business Daily that after Japan announced that it would withdraw from negative interest rates and YCC (yield curve control) and raise interest rates, the market reaction was loose. This is because the market has expected that Japan's inflation level and rising asset prices will force monetary policy to normalize, but the Bank of Japan has taken measures that are lower than the market expects, resulting in a market interest rate cut instead, the yen exchange rate has plummeted, and the Nikkei index has risen sharply.
But recently, with the speech of hawkish BOJ member Tamura Ueki, the market has once again fallen into uncertainty. Chen Jia pointed out that Tamura Planting's emphasis on the need to speed up the normalization process of Japan's monetary policy has brought new trading signals to the market. As a result, the U.S. dollar index fluctuated, and the RMB exchange rate was also affected, and the market impact was very significant.
In response to the future trend of the yen, Takeshi Higashifukazawa, an economist at Japan's Mizuho Research Institute, wrote in the media on the 6th that the dollar may remain strong in the short term. Since then, the US dollar is expected to gradually weaken and the yen to gradually strengthen by the end of the year as the Fed moves into a rate-cutting cycle.
Interest rate spreads between Japanese and overseas yen-denominated bonds have narrowed to their lowest level since September 2022. In his annual letter to investors at the end of February, Buffett said Japanese trading companies were following investor-friendly policies, which sparked speculation that he might increase his stake in these companies. Berkshire Hathaway's current investment in Japan is largely raised through yen bonds, the letter said.
Previously, Warren Buffett made a surprise bet on the Japanese stock market during the pandemic. Munger once explained, "This is a once-in-a-century opportunity that can reap huge rewards with almost zero risk." "The interest rate in Japan is 0.5 percent per year for 10 years," Munger said. So you can borrow all the money 10 years in advance, you can buy stocks, and those stocks have a 5% dividend, so there's a lot of cash flow, there's no need to invest, there's no need to think, there's nothing to do. ”
Continue to increase the Japanese market
In the past two years, Warren Buffett has been quite active in the Japanese market. Berkshire has been one of the largest overseas issuers of yen bonds since its first Japanese yen bond was issued in 2019, choosing the yen in 32 of its last 40 bond offerings. As of September last year, Berkshire had issued about $7.6 billion in yen bonds.
In addition to continuous bond issuance, in August 2020, Berkshire announced for the first time that it passively held 5% of the shares of Japan's "five major trading companies", and then revealed in June last year that it had increased its shareholding to more than 8.5%, and in a shareholder letter released in February this year, Buffett revealed that Berkshire held about 9% of the shares of these five companies.
In his shareholder letter, Buffett said that diversification, high dividends, high free cash flow, and prudent new stock issuance are important reasons for his preference for the five major trading companies: Itochu Corporation, Marubeni, Mitsubishi, Mitsui and Sumitomo have all followed a shareholder-friendly strategy, and since we began acquiring Japanese stocks, all five companies have reduced the number of outstanding shares at attractive prices.
As for how long he will hold them, Buffett said in his shareholder letter that he will continue to hold shares in the five major trading companies for a long time, and he previously revealed that Berkshire plans to hold these investments for 10 to 20 years.
The Big Five trading companies are among Buffett's most successful investments in recent years, more than doubling on average since Berkshire acquired the five stocks in 2020. Japan's stock market has been soaring, with the benchmark Nikkei 225 surpassing its 1989 all-time high of 38,957.44 points.
Berkshire's current investment costs in these five companies totaled 1.6 trillion yen, and the market capitalization of the five companies at the end of the year was 2.9 trillion yen. As the yen has weakened in recent years, Berkshire's year-end unrealized dollar gains stood at 61% or $8 billion.
After the issuance of this round of yen bonds, Buffett is likely to continue to increase his bets on Japanese stocks. After Berkshire issued yen bonds in April last year, Buffett visited Japan that month and met with executives from a number of trading companies. In June, Warren Buffett announced that he would increase his holdings in Mitsubishi Corporation and Itochu Corporation, a move that boosted confidence in the overall Japanese stock market and pushed it to a 33-year high.
Today, Berkshire has become one of the most high-profile overseas investors in the Japanese stock market. An analyst at Japan's Daiwa Securities wrote earlier this month that Buffett may look at Japanese banks, insurance companies and automakers as his next investment target. In addition to trading company stocks, Berkshire Hathaway is also likely to buy stocks of some undervalued companies in the Japanese stock market that have a brand advantage or in the financial sector, Ishitoya predicts.