American billionaire Warren Buffett’s legendary holding company Berkshire Hathaway is planning another foray into the Japanese bond market, according to a recent announcement by lead underwriter Mizuho Securities. Berkshire looks to sell fresh yen-denominated debt to institutional investors, returning just months after its last issuance.
This surprise move comes as market expectations build that the Bank of Japan (BOJ) will finally move away from its unorthodox negative interest rate policy in 2023. The potential end of this stimulus era promises to push up borrowing costs across Japan. Yet yields still remain attractive versus American and European alternatives.
Speculation of BOJ Normalization Weights On Bonds
Markets are betting that new central bank governor Kazuo Ueda will continue steering Japan away from its quantitative easing (QE) program in the coming months. The BOJ has kept its key short-term rate at -0.1% since 2016, while also capping 10-year government bond yields at 0.25% via yield curve control.
But with inflation rising globally, the BOJ faces growing pressure to follow other major central banks in tightening policy. Just last week, Governor Ueda effectively lifted the ceiling on 10-year yields, giving investors a green light to push rates higher in anticipation of further steps away from negative rates.
This shifting sentiment has already impacted the Japanese corporate bond market. Speculation of less BOJ stimulus tends to push yields upward, increasing borrowing expenses.
Berkshire’s April Deal Faced Higher Rates
Back in April 2022, Berkshire Hathaway issued 164.4 billion yen ($1.1 billion) in bonds across five tranches. The conglomerate paid some of its highest yields ever for yen debt, as tightening expectations added costs.
Rates were still low compared to historical averages. But they proved elevated relative to the rock-bottom yields Japan has seen under years of QE and yield curve control.
According to fund manager Haruyasu Kato of Asset Management One:
”With interest rates looking high, they may want to take a fixed term for as long as possible, but it will still be a cheap procurement for them. We are at a turning point for the Japanese corporate bond market.”
The decision to return just months later signals Berkshire remains keen on locking in fixed income at relatively high rates, before the BOJ hikes any further.
Buffett’s Growing Appetite for Japan
While Berkshire Hathaway hails from Omaha, Nebraska, the company has demonstrated a growing appetite for Japan under CEO Warren Buffett. Its fresh bond issuance comes against a backdrop of surging investments in Japanese equities.
In June 2022, the legendary investor significantly increased Berkshire’s holdings in five major Japanese trading houses — Mitsubishi Corp, Mitsui & Co., Itochu Corp, Marubeni Corp, and Sumitomo Corp.
This vote of confidence from one of the world’s most respected value investors helped lift the benchmark Nikkei 225 index to a 33-year high. Locals affectionately refer to the 91-year old Buffett as the “Oracle of Omaha.”
Buffett also made a rare personal visit to Japan in April, meeting with senior executives across various companies. The trip underscored his focus on hunting for undervalued opportunities in the world’s third largest economy.
Analysts believe Japan’s well-run, cash-generative firms appeal to Buffett’s value style. The yen’s sharp depreciation against the US dollar this year has made assets cheaper for foreign capital as well.
Berkshire’s Broad Business Ties to Japan
But Berkshire Hathaway is far from a passive investor when it comes to Japan. Beyond its equity portfolio, the conglomerate holds extensive operating business interests across the country.
For example, Berkshire owns over 5% stakes in Japan’s five major trading houses — Mitsubishi, Mitsui, Itochu, Marubeni, and Sumitomo. It holds large equity positions in domestic stalwarts like Kirin Holdings and Mitsui Sumitomo Insurance Group.
Various Berkshire subsidiaries also own manufacturing plants along with industrial and consumer operations in Japan. These include household names like Duracell batteries and chemical maker Lubrizol.
This wide business footprint generates profits for Berkshire in yen terms. Issuing yen-denominated bonds provides a natural currency hedge and enables efficient financing of Japanese investments.
Path Ahead for BOJ Policy Normalization
Markets expect the BOJ to continue gradually moving away from its ultra-stimulative monetary policy in 2023 under Governor Ueda. However, most predict the central bank will normalize cautiously to avoid rattling markets.
Potential upcoming changes include widening the band on 10-year yields beyond 50 basis points, adjusting yield curve control targets, and tapering asset purchases. An actual hike to the negative short-term interest rate is not anticipated until 2024 at the earliest.
As stimulus is pared back, Japan’s era of minus 0.1% rates will conclude. But the BOJ is still seen lagging behind the aggressive tightening pace of the Fed and other central banks. This should keep Japanese yields attractive relative to international alternatives.
The bottom line is that Warren Buffett’s Berkshire Hathaway is poised to sell more yen-denominated bonds, locking in fixed income returns amid BOJ policy normalization. Japan’s negative interest rate experiment may be ending, but borrowing costs still look relatively low for issuers.
Given its large wagers on Japanese stocks and businesses, Berkshire’s yen bond issuance makes strategic sense. The debt provides inexpensive, currency-hedged financing for its local operations. Expect other global firms to follow Berkshire’s lead into the Japanese bond market in 2023.
Just don’t hold your breath for the 91-year old Buffett to start yelling “Kanpai!” over sake bombs in Tokyo anytime soon. The veteran investor is likely to stick to his signature value investing strategy. But if he wanted to spice up those stale old board meetings at Berkshire HQ, wearing a Godzilla costume would certainly get people’s attention!