In August 2020, Warren Buffett revealed that Berkshire Hathaway had invested around $6bn into five Japanese firms. Some analysts believe that this has netted a $2bn profit so far. In light of this, I’m looking at the Japanese stock market and how I might invest.
Why Japan?
Japan is home to the third-largest stock exchange in the world, the Tokyo Stock Exchange, and some of the world’s most famous companies such as Sony and Toyota.
The most well-known Japanese stock market index is the Nikkei 225. This index tracks the largest and most liquid 225 publicly listed companies in Japan. It’s also used as a general measure of Japan’s economy and it’s stock market’s performance.
There are a few reasons to think that the Sage of Omaha sees opportunities in the Land of the Rising Sun. First, at the time of writing, the index is at just under 27,500. This is still well below the 38,915 level it reached in December 1989. Second, though the long-term average P/E ratio of the S&P 500 index in Warren Buffett’s domestic US market is around 15, it currently sits a lot higher at around 25. At the end of 2021, the flagship Japanese index was around 17. Perhaps he sees better value in Japan.
An ETF to consider?
An ETF (exchange-traded fund) is a low-cost fund that tracks an index or sector and can be bought and sold like a share through most online brokers. Such an approach allows me to invest in the Nikkei 225 by just buying shares listed on the London Stock Exchange. For my portfolio, this seems to be the simplest way of investing in Japanese shares.
The one I’m looking at is Xtrackers Nikkei 225 UCITS ETF (LSE:XDJP), which has been trading since 2013 and has a very reasonable management charge of 0.09%. The three largest holdings at the moment are Fast Retailing, which owns the global Uniqlo brand, Tokyo Electron, which produces semiconductors, and Softbank, the investment management juggernaut.
Perhaps the biggest drawback of investing in Japanese stocks is that it is completely new for me. This is a market I do not have a lot of knowledge about and that could be very risky.
Also, the performance of this ETF has been poor. Over 12 months this fund is down around 12% and year-to-date has fallen around 7%.
Reasons for optimism
However, despite these negatives, I feel there are reasons to be optimistic going forward.
First, the relatively new Prime Minister, Fumio Kishida, is enacting policies that could be positive for the Nikkei over the next few years. For example, Japan’s Digital Agency was launched in 2021. Investors expect this to drive digital transformation across both public departments and the private sectors. Second, ambitious targets have been set to reduce emissions. This could see a lot of money flowing into energy companies or firms involved in clean power technology.
Investing in a different market can be unnerving and risky. However, it also provides opportunities to learn. For my own holdings, I’m seriously considering following Warren Buffett’s lead and investing in Japanese stocks as part of a balanced portfolio.