International Investors Are Turning More to Japanese Companies

In April, Berkshire Hathaway, Warren Buffett’s company, increased its stakes in the five largest Japanese trading houses: Itochu, Marubeni, Mitsubishi, Mitsui & Co, and Sumitomo. The legendary investor now owns 7.4 percent in each company, representing Berkshire’s largest capital outside the U.S. and Europe.

In his recent interview with CNBC, Buffett stated that Japanese corporations were selling at what he considers a ‘ridiculous price, compared to the interest rates that prevailed at the time.’ Moreover, the billionaire mentioned that he might invest more actively in the country.

Why is Japan attracting attention?

For decades, Japanese companies have been known for their inefficiency in capital allocation. Their return on invested capital (ROIC) lagged behind American and European companies. However, in recent years, Japanese companies have made significant progress in improving their operational efficiency. As a result, the average ROIC for Japanese blue chips has reached the same levels as in the U.S. and slightly surpassed Europe.

Today, Japanese companies demonstrate good operational efficiency but remain undervalued. It will take time before investors change their stance towards Japan. Berkshire Hathaway’s purchases could be a catalyst for such changes.

In early April, the Tokyo Stock Exchange sent a memorandum to listed companies stating that companies trading at a discount to their book values should officially submit a list of actions aimed at improving capital allocation to raise stock prices. This fact has evidently attracted the attention of foreign investors. Also, at the end of March, the renowned hedge fund of Ken Griffin, Citadel, valued at $54 billion, announced plans to reopen its office in Tokyo this year.

Such attention towards Japan indicates an increasing investment attractiveness of the country. Analysts at Freedom24 have selected three Japanese stocks that could provide high returns for their investors:

Mitsubishi UFJ Financial Group (MUFG) is the largest banking holding in Japan. Besides its domestic market, the company is active in the U.S., Europe, Asia, Oceania, and other international markets. Mitsubishi UFJ Financial offers a wide range of services, including commercial banking, fiduciary services, as well as investment banking services.

Mitsubishi UFJ Financial stands out for its quality and diversified loan portfolio. The largest portion of loans on the bank’s balance sheet consists of loans to domestic companies, while a significant share also comes from foreign loans, thereby reducing currency risks for foreign investors. At the end of the last reporting period, the company’s non-performing loan ratio was 1.02%, which is below the average level in the U.S. banking industry.

Many institutional investors have recently increased their stakes in Mitsubishi UFJ Financial. These include UBS Group, which increased its equity stake in Mitsubishi UFJ Financial by an impressive 628% to $3.39 million. Boothbay Fund Management raised its position by 112.5% to $4.21 million. Capricorn Fund Managers tripled its stake to $9.37 million, and Jane Street Group increased its equity stake by an astonishing 1,929.8% to $27.6 million.

Canon (CAJ) is a specialized company in the production of optics, industrial equipment, and imaging products. The company’s products include video and photo cameras, professional displays, projectors, photolithography equipment, scanners, printers, binoculars, microscopes, diagnostic systems, video surveillance solutions, and rotary encoders.

While most consumers know Canon for its cameras, the company’s main focus is on commercial and B2B markets. Canon operates in five segments: printing, imaging (including video and photo cameras), medical devices, industrial, and other operations. More than 55% of the company’s expected annual revenue comes from the printing segment. At the same time, the company’s revenues are widely diversified across geographic regions, with North America and Europe being the largest, minimizing currency risks for potential investors. Investors should keep in mind that the photographic capabilities of other digital devices, including smartphones, have significantly improved, and consumer preferences have begun to change. As a result, the market for digital cameras is shrinking, and market competition is intensifying.

In November 2022, Canon announced the establishment of a new subsidiary to strengthen its presence in the U.S. medical market. The medical segment is the third-largest source of revenue for the company, and expanding its presence in the world’s most influential market could spur growth. The new subsidiary, Canon Healthcare USA, is expected to complement the offerings of the previously established Canon Medical Systems USA, and we will see the first results this year. In 2022, the medical segment grew by 6.9% compared to the previous year.

Sony Group Corporation (SONY) designs, manufactures, and sells electronic equipment and devices for consumer, professional, and industrial markets in Japan, the U.S., Europe, China, the Asia-Pacific region, and other countries. Additionally, the company creates and distributes digital and entertainment content.

Game & Network Service (GNS) has long been the company’s largest business segment. By the end of the last reporting period, GNS revenue in local currency grew by an impressive 53.3% year-on-year. We expect the segment to continue to grow as Sony continues to record market demand for its gaming console, PlayStation 5. Within the entertainment, technology, and services segment, Sony offers touch sensors and other solutions to nearly all leading smartphone manufacturers. The music segment also grew by 22.9%, driven by increased sales of recorded music and music publications through streaming services. Sony’s film and series segment also has several drivers for long-term growth. Sony owns the rights to several iconic franchises, including Spider-Man, Jumanji, Uncharted, and The Last of Us. Major releases such as Spider-Man: Across The Spider-Verse, Kraven the Hunter, and Ghostbusters Sequel are coming soon.

Furthermore, Sony has significant potential in the virtual reality (VR) gaming market. The VR market in the gaming industry is expected to grow at an incredible annual rate of 30.4% by 2030, reaching $76.4 billion by the end of the projected period. Sony recently introduced the latest iteration of its own VR headset, PlayStation VR 2. Although pre-orders were below expectations, the headset received high ratings from industry experts.

In other words, in every segment, Sony has certain drivers for long-term growth. Some of these are already reflected in the company’s profit and loss statement.

Key Risks

Overall, while the Japanese market has significant growth potential, there are two factors that could affect that growth. The first is currency. A stronger U.S. dollar or a weaker Japanese yen could impact the business results of Japanese companies, thus bearing currency risks for investors. The Japanese economy also faces some macro risks, including slow growth and deflationary pressures.

The country also faces demographic challenges such as an aging population. Investors in Japanese stocks should consider these risks when making their investment decisions, as they can impact business in the long term. Conducting your own analysis before making any investment decisions is crucial, as there are risks associated with any investment, exposing your capital to risk, and past performance is not necessarily indicative of future returns.