DEFINING THE SHIFT
With Japan's economic renaissance driving growth in diverse industries,
forward-looking strategies ensure resilience to geopolitical risks
while advancing a global shift to more sustainable practices.
Why the world’s most famous investor is
betting on Japan’s trading houses
Global investors have been flocking to a fizzing Japan over the last year.
In 2023, the Nikkei 225 index surged by 28 per cent to hit a 33-year high, handily outperforming most other major market indices. In January 2024, it crossed the 36,000 mark for the first time in 34 years.
Explanations for this latest Japanese equity rally are various. A weak yen, ultra-low interest rates and low company valuations are among the most cited. So are increasing prices and wages, finally pulling Japan out of decades of deflation. Rising dividends and share buybacks as well as accelerating reform across many Japanese companies are boosting value.
Importantly, market leaders believe this is no false dawn.
In October 2023, BlackRock’s chief executive Larry Fink declared Japan is “undergoing a series of extraordinary economic transformations”. Speaking at a gathering of investors in Tokyo, he compared current global interest to the country’s economic “miracle” that lasted through the 1980s, adding he “expects this miracle to last much longer”. Top investment banks are bullish, largely concurring on even more upside.
But the greatest seal of approval, one which set this rally going, is the backing of Warren Buffett. In August 2020, the legendary investor disclosed the purchase of 5 per cent stakes in each of the country’s five sogo shosha — highly diversified global industrial conglomerates that trade and invest in various products and services. Since then, Buffett’s Berkshire Hathaway has added to these holdings multiple times, raising the stake to an average of 8.5 per cent.
The strength of a diversified business portfolio
Buffett says his faith in these companies stems partly from the fact that they are “similar to Berkshire” in owning a lot of different interests.
Although sogo shosha translates to general traders and intermediaries, these companies have transformed their business models and domains beyond those traditional roles. They are now better understood as industrial conglomerates and operating investors, holding diversified business portfolios across industries globally.
Though investors tend to value diversified businesses at less than the sum of their parts, a concept described as “conglomerate discount”, Mitsubishi Corporation (MC) aims to generate a “conglomerate premium” by leveraging the diversity and synergies amongst its range of businesses.
In a world undergoing significant changes across all industries due to environmental and digital shifts, including the introduction of AI, traditional business models and value chains are getting a makeover. Companies with diverse portfolios and broad market exposure, like MC are proving to be competitive players. Being a global industrial conglomerate gives the company the advantage of creating new business models and strategically positioning itself in new and emerging markets.
But there is more to MC, which brings additional propositions to the table across its wide-ranging portfolio.
Although motors and electronics might initially spring to mind when thinking of Mitsubishi, MC is a different entity from the eponymous companies that form the Mitsubishi Group.
The company is the largest sogo shosha by revenue (¥21.57tn), consolidated net income (¥1.18tn) and market cap (¥6.8tn) for the year ending March 2023, with the kind of performance indicators that appeal strongly to value investors: high credit ratings, low leverage, strong consolidated net profits and attractive total payout ratios, combined with a robust growth track record.
The company’s current portfolio is diversified, with numerous businesses driving its strong cash flow such as natural gas, mineral resources, automotive/mobility and food. This balanced portfolio generates resilience to both geopolitical risks and cyclical downturns.
For traders and investors, intelligence is alpha and omega. The sogo shosha has an edge, with intelligence pouring in from its vastly diversified investments, partnerships and relations with leading companies in adjacent industries across the globe.
Among its peers, the company has distinguished itself with prescient investments such as copper, LNG and other prime assets before global demand took off, providing first-mover advantages and higher margins in these markets.
In the company’s annual report from 2023, chief executive Katsuya Nakanishi says, “Since our founding, we have been capitalising on our collective capabilities, including our accumulated intelligence and industry knowledge in line with the changes and issues faced by society in each era, and constantly pushing forward to create value by addressing these challenges… I aim to foresee half a step or even one step ahead and to be strongly aware of our response to future changes.”
How a diversified portfolio has enabled
long-term investment in the energy transition
All companies must now prepare for the green transformation, and investors are particularly focused on how Japan’s sogo shosha, with large exposure in energy and commodities, can manage this shift.
In the same report, Nakanishi also notes, “I believe that the trend toward decarbonisation taking place in all industries throughout the world is irreversible, however, the path and timeline to reach decarbonisation differs by country and region. I am convinced that decarbonisation represents a great opportunity for MC, given its diverse portfolio and active involvement in a wide range of businesses related to decarbonisation”.
Having exited the upstream thermal coal sector in 2018, out of concern for its environmental impact, it has been expanding into sustainable energy businesses, including offshore wind, hydrogen, and carbon capture, utilisation and storage (CCUS). The company earmarked ¥1.2tn for various energy transition projects between 2022 and 2024.
The company says it is committed to halving emissions by FY2030 from an FY2020 baseline, and strives for net zero by 2050, with steady progress in reducing scope 1, scope 2 and investment-related scope 3 emissions.
A cross-section of global opportunities
Intelligent conglomerates will be vital players in an increasingly borderless economy with few distinct divisions across sectors and markets. In Buffett’s own words, sogo shoshas are “a cross-section of not only Japan but of the world” regarding growth opportunities. As such, the company’s unique structure and strong free cash flows allow it to find profit pools in the value chain and invest flexibly in various industries.
Nakanishi is distinctly aware of this double role and is ensuring MC is positioned strongly for the future, including ensuring the company is attracting the best and brightest — MC consistently ranks in among the most popular employers for Japanese top university graduates in the last 5 years.
“We are indeed a global company and a Japanese company at the same time. If Japan loses its national strength, its presence will decline comparatively on a global basis,” notes Nakanishi in the company’s annual report from 2023. “That is exactly why I believe that we should contribute to bolstering Japan’s national strength. Effective and meaningful ways for us to do so include fostering new industries and taking part in creating a new future through regional revitalisation.”
Buffett’s investments have been a boon for the sogo shosha and Japan. However, the most crucial factor for long-term impact lies in MC’s commitment to keep growing these stakes sustainably into the future.
- *1 The above figures represent the Scope 1 and Scope 2 emissions of MC and its consolidated companies, including affiliates, based on the equity share approach
- *2 Any residual emissions, after reduction efforts have been made, will be neutralised using internationally-accepted offsetting methods including carbon removal.
- *3 https://mitsubishicorp.disclosure.site/en/themes/161/#1330
