August 07, 2024 • 4 min read

Asia Market Access: Japan - The Hidden Gem for Global Dealmakers

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Japan has transformed from a perceived premium market to a more cost-competitive landscape, making it an increasingly attractive destination for international investors.

While the favorable Japanese yen exchange rate has attracted international investors, in our view, it is not the primary reason we are seeing an explosion of cross-border M&A activity with Japan, both inbound as well as outbound.

Leveraging three decades of Japanese cross-border M&A expertise, DC Advisory’s Asia Access team discusses the drivers propelling Japan to the forefront of global dealmaking, and the key trends shaping the Japanese corporate landscape, including:

The 'Buffett Effect'
Fragmentation of Japanese industry
The transformation of Japan's corporate culture
Government drive for corporate governance
Fundamentally good businesses
Selection and focus
The evolving role of private equity

Discover how these trends are creating unprecedented opportunities for investors and corporates seeking to capitalize on Japan’s dual role as a lucrative investment destination and powerful strategic acquirer.

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Warren Buffett’s strategic bet on Japan

In 2020, Warren Buffett’s Berkshire Hathaway acquired substantial stakes in Japan’s five largest trading houses: Mitsubishi, Itochu, Mitsui & Co., Sumitomo, and Marubeni.[i] This $6-7bn investment, amounting to approximately 5-8% ownership in each company, was driven by Buffett's belief in their undervalued potential and the broader transformation of the Japanese corporate landscape.

Fast forward to 2024, and Buffett’s foresight is evident. Berkshire Hathaway has increased its holdings in these trading houses to around 9%, and at the end of 2023, the investment made in 2020 has already translated to unrealized gains of 61% or $8bn[ii]. Buffett expressed strong confidence in the long-term potential of the Japanese economy and the selected trading houses, highlighting their global presence and diversified operations as significant strengths.

The unique business models of these trading houses, known as sogo shosha, span a wide range of industries, including energy, metals, machinery, chemicals, textiles, food, and general products. This diversification enables them to leverage synergies, optimize resource allocation, and mitigate risks effectively. For instance, Mitsui & Co. is involved in Infrastructure projects, iron and steel products, mineral and metal resources, chemicals, and energy, while Itochu operates across textiles, machinery, metals, minerals, energy, chemicals, food, and general products.[iii]

Japan’s unique growth drivers, such as its emphasis on innovation, its robust industrial base, and strategic geographical location, benefit the trading houses, along with their advanced logistics and technological capabilities. Their holistic views and involvement in many industries across the entire span of various value chains (their hallmark ‘vertical integration’ business model), can also be leveraged to develop new business models, technologies, and services.

We delve deeper into the factors driving Buffett’s success, exploring the broader implications for investors and businesses seeking to capitalize on Japan's evolving market dynamics.

A message from Tosh Kojima, Asia Access, Managing Director:

“To thrive in the burgeoning landscape of Japanese M&A, global dealmakers must become fluent in the language of Japanese business. This requires deep diving into local nuances, building strong partnerships, and understanding the intricate interplay of culture, regulation, and strategy. By mastering these elements, dealmakers can position themselves as indispensable partners to Japanese corporations seeking to expand their global footprint. The best buyer of your business may well come from Japan.”

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Appendix

DC Advisory has prepared this material solely for informational purposes and it is not a research report. This material does not constitute or form part of, and should not be construed as, an offer to sell, or a solicitation of any offer to buy, or any recommendation with respect to, any securities. For other important information, please read our Insights & Publications disclaimer >

Sources

[i] Nikkei Asia, Jun 2024: Buffett-backed Japan trading houses quadruple profit in 2 years - Nikkei Asia

[ii] https://www.berkshirehathaway.com/letters/2023ltr.pdf

[iii] Company | Services & Products - MITSUI & CO., LTD.

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