Warren Buffett and the Japanese sogo shosha

Yesterday, Warren Buffett announced that one of his insurance companies, National Indemnity, has acquired 5%+ positions in each of the five largest general trading companies (sogo shosha) in Japan. The yen currency asset exposure this creates is reportedly hedged through National Indemnity’s ownership of yen-denominated liabilities.

Buffett has given no rationale that I’ve seen for his purchase, although press reports point to stock prices at 75% of book value.

As it turns out, I spent a lot of time studying the Japanese trading companies at one point in my working career. I was a significant shareholder in Mitusbishi Corp. for a couple of years, and got to know that company quite well.

The general trading companies grew in importance to the Japanese economy after WWII as the country became a growing exporter of all sorts of goods. Each of the large industrial conglomerates (zaibatsu/keiretsu)–Mitsubishi, Mitsui, Sumitomo…–consolidated all its dealings with foreign countries, especially trade finance, in a single entity, its in-house trading company. Given that Japan is a natural resource-poor country, lacking energy resources in particular, the keiretsu were tasked by Tokyo with arranging for steady energy supplies. This task fell to the sogo shosha, as well.

The obvious investment attraction of the sogo shosha is that they’re cheap. On the other hand, they tend to remain cheap, for several reasons:

–the trading companies are embedded in the old samurai-era conglomerate structure. This is the most rigidly hierarchical, stuck in the mud part of the Japanese economy. They are tightly bound to the conglomerate whose name they bear and a re not free to make the economically best decisions for themselves

–they tend to have hundreds of subsidiaries, without any apparent desire to rationalize their structure

–they’re basically finance companies, which tend to trade at low multiples

–in the energy area, they act as national champions, not necessarily as profit-maximizing entities for themselves.

It will be interesting to see whether in this case Buffett is much more deeply knowledgeable about these Japanese firms than I am or whether this is another case of beefing up tech exposure by buying IBM because it looks cheap.