In the Tokyo Stock Exchange's bustling trading hall, the stock codes of Japan's five major trading companies illuminate the electronic boards with a dazzling redMitsubishi Corporation's shares surged by 8.7% at the opening, closely followed by Marubeni and Mitsui & Co., even as the Nikkei 225 index saw a decline of over 1%. This phenomenon of 'contrasting fortunes' can be traced back to Warren Buffett’s renewed endorsement of Japanese trading firms in his latest shareholder letter from Berkshire Hathaway.

Buffett's recent comments might be characterized as a 'golden decree' for Japanese trading housesIn the shareholder letter released on Saturday, the "Oracle of Omaha" unusually dedicated one-third of his writing to detailing the investment rationale behind the five major trading companies: "Our stake has risen to 7.4%, and we intend to hold it for decadesThese firms exemplify prudent capital management, global positioning, and risk-hedging capabilities, making them ideal investments in turbulent times." Berkshire's holdings indicate that it has acquired an 8.2% stake in Mitsubishi Corporation, with Marubeni shares bought at a cost basis only 42% of the current share price.

The 'anti-fragility' of Japan's trading firms stands out as the pivotal reason for Buffett's endorsement

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The business operations of these five companies span across 12 sectors including energy, metals, food, and retail, establishing a unique 'industrial ecosystem.' Mitsubishi Corporation controls 15% of global LNG trade while also operating Japan's largest television shopping platform; Marubeni possesses a vast 1.2 million hectares of soybean plantations in Brazil while investing in U.S. shale gas projectsThis 'dynamic duo' structure allows them to exhibit remarkable resilience against risks stemming from commodity price fluctuations and geopolitical conflictsForecasts indicate that the five trading companies will see net profits rise by 28% in 2024, significantly outpacing the average 12% increase for constituents of the Nikkei 225.

Valuation discrepancies coupled with capital agility create a dual allureCurrently, these five trading houses display an average price-to-book ratio of 1.2, which is strikingly lower than the 2.5 for S&P 500 energy stocksMore critically, these entities are showing continuous improvement in capital returns: Mitsubishi's return on equity (ROE) has climbed from 8% in 2020 to 14%, while Marubeni's free cash flow yield reaches 6.3%. Buffett particularly appreciates their 'prudent yet flexible' capital management — the five companies are projected to repurchase 3.2% of their total shares in 2024 while maintaining a robust dividend payout ratio of 45%. This 'offensive and defensive' strategy aligns closely with Berkshire's investing philosophy.

Dramatic shifts in the global economic landscape underscore the strategic value of Japanese trading firmsThe escalating U.S. tariff policies against China have prompted a restructuring of global supply chains, a move that these trading companies anticipated as early as the 2010s by developing their positions in Southeast Asia and Africa

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Mitsui's electronics components manufacturing base in Vietnam has achieved 70% localization in procurement, while Itochu Corporation's agricultural project in Nigeria covers two million farmersSuch a 'decentralized' strategy minimizes their exposure to trade frictions, evidenced by a drop in dependence on the Chinese market, reduced to 22% in 2024, a decrease of 15 percentage points since 2018.

Buffett's investment decisions also subtly signal a bet on Japan's economic transformationWith the Bank of Japan gradually retreating from its Yield Curve Control (YCC) policy and long-term government bond yields surpassing 1%, the low-debt advantages of trading companies have increasingly come to the forefrontMitsubishi's net debt-to-equity ratio is only 0.3, contrasting with its American counterpart ExxonMobil's 0.6. This financial flexibility positions them to be more competitive during periods of rising interestMoreover, their investments in hydrogen energy and carbon capture resonate with Japan’s governmental "green growth strategy" — Marubeni aims to establish the world's largest green ammonia production base by 2030, and the Fukushima hydrogen project led by Mitsubishi has already received a 50 billion yen subsidy from the government.

However, latent risks should not be overlookedThe global positioning of Japanese trading firms exposes them to various geopolitical risks: Mitsubishi’s 15% stake in the Russian Arctic LNG project faces potential sanctions from the West, and Mitsui’s lithium mining assets in Australia could fall victim to the ramifications of China-Australia relationsMore critically, Japan's aging population has resulted in labor shortages that could hamper the development of emerging industries, as evidenced by the Ministry of Economy, Trade and Industry’s report indicating that the vacancy rate for technical positions within trading firms has reached 23%.

Divergent market sentiments are growing

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Kazunori Ito, an analyst at Daiko Securities, observes: "Buffett’s endorsement might spark short-term speculation, but the long-term growth of trading firms is still contingent on a global economic recovery." His data models forecast that if global GDP growth falls below 2%, the net profits of trading firms could face a downturn of 15%. Meanwhile, UBS has released a report stating: "Driven by the dual factors of the AI revolution and energy transition, the resource integration capabilities of trading firms will unleash significant value." The bank has raised the average target price for the five trading companies by 20%.