Bullish on Globally Oriented Japanese Companies

Key Takeaways

» Investor sentiment toward Japan has been buoyed by positive developments including Berkshire Hathaway’s increased investment in Japanese trading houses.

» Many of the Fund’s holdings are not involved in manufacturing or have strong pricing power and well-established value chains within the U.S., helping to mitigate tariff risks.

» The Bank of Japan will likely continue its gradual normalization of interest rates to manage inflation and maintain economic stability and wage growth could turn positive in the foreseeable future.

» Assuming corporate profits grow in the low to mid-single digits, shareholder return policies strengthen, and valuation multiples expand, we believe Japan’s stock market could see double-digit annualized returns in the future.

» Japanese companies are currently expanding their global footprint and leveraging Japan’s unique strengths in manufacturing, operational efficiency, and innovation to create substantial value.

How has the volatility in the U.S. impacted the Japanese market?

While U.S. market volatility may have led to some caution among global investors, we believe Japan’s market has shown resilience to some extent. The economy remained largely on course for growth in the first quarter of 2025.

Additionally, investor sentiment toward Japan has been buoyed by positive developments including Berkshire Hathaway’s increased investment in Japanese trading houses, signaling confidence in Japan’s economic growth. Japan’s relatively lower valuations, compared to the U.S. and Europe, have made its equities appear more attractive. 

How has the uncertainty around tariffs affected Japanese companies?

Concerns about potential tariffs and trade disruptions could introduce challenges, especially for Japanese manufacturers and exporters. However, we believe the uncertainty has had a limited impact on the Hennessy Japan Fund’s portfolio companies due to their business models and strategic positioning. Many of the companies we invested in are either not involved in manufacturing or have strong pricing power and well-established value chains within the U.S., which helps mitigate tariff risks.

For example, Recruit Holdings (the parent company of Indeed) and Sony Group are not manufacturing businesses, so they are insulated from tariff risks. Meanwhile, manufacturing companies like Keyence and Hitachi produce high-value, high-margin products with strong demand.

• Keyence develops factory automation sensors that save costs for industrial customers, ensuring consistent demand.

• Hitachi benefits from the growing need for power grid solutions due to the rise of AI, which should further support the robustness of its products.

Lastly, companies such as Shin-Etsu Chemical, which have a fully integrated supply chain within the U.S. (mainly in Texas and Louisiana), are well-positioned to weather any potential tariff impacts, as they have a long-established presence and a strong track record in the market. Overall, we believe the portfolio is well positioned to handle any potential tariff uncertainty due to the strategic nature of these companies.

Would you please provide an update on inflation, wage hikes and Japan’s interest rates?

The following provides our thoughts on inflation, wage hikes and the direction of interest rates:

• Inflation: We believe Japan has successfully emerged from deflation, with core consumer price index (CPI) remaining around 2% since 2022. This shift sets the stage for potential economic growth, which could translate to higher returns on equity and rising stock prices. Nationwide wage hikes are crucial in preventing stagflation, and they are positively influencing consumer behavior. With households becoming more inclined to spend rather than save during times of inflation, the economy is expected to continue benefiting from increased domestic consumption.

• Interest Rates: We believe the Bank of Japan (BoJ) is likely to continue its gradual normalization of interest rates to manage inflation and maintain economic stability. Given past experiences of prematurely tightening policy, the BoJ will likely take a cautious approach, ensuring that inflation remains sustainable before making further moves.

• Wage Hikes: Japan’s spring wage negotiation season, or “Shunto,” has seen a positive shift in recent years, with labor unions securing notable wage hikes after decades of stagnation. Two years ago, base salaries rose by around 3-4%, and last year they increased by 4-5%. This year, firms agreed to an average wage hike of 5.46%, marking the second consecutive year of wage increases exceeding 5%—the highest in 34 years. While real wage growth remains negative when adjusted for inflation, we believe it will turn positive in the foreseeable future.

Warren Buffett recently announced that Berkshire increased its share of the Japanese trading houses. How does this affect your view of Fund holding Mitsubishi?

The good news is that Berkshire Hathaway recently announced an increase in its holdings across five major Japanese trading houses, including Mitsubishi Corporation. Warren Buffett’s decision to reduce his U.S. equity portfolio, while doubling down on Japan, likely reflects strong confidence in the broader Japanese stock market and these companies specifically.

This move aligns with our positive outlook on Mitsubishi Corporation and reinforces our conviction in holding it within the portfolio. Having invested in Mitsubishi for a longer period than Berkshire, we view this as validation of our investment thesis. Mitsubishi’s diversified operations across energy, infrastructure, finance, and consumer goods, coupled with its strong cash flow generation, make it well-positioned for long-term growth. Berkshire’s increased stake further highlights Mitsubishi’s attractiveness as a solid investment in Japan’s undervalued market.

Buffett’s focus on companies with strong cash flows, prudent management, and long-term growth potential underscores Mitsubishi’s strengths. Additionally, ongoing structural reforms in Japan—such as improved corporate governance and rising shareholder returns— enhance its prospects. With its global presence and resilience during economic fluctuations, we believe Mitsubishi Corporation remains a compelling investment.

Would you please comment on any portfolio changes in Q1?

We increased the weightings of homebuilders such as Sekisui House, Sumitomo Forestry and Daiwa House Industry. Japanese homebuilders are expanding into the U.S. market by leveraging their manufacturing excellence. They offer high-end, quality homes with efficient construction methods, targeting the top end of the market. We see this as a potential long-term growth opportunity, similar to how Japanese automakers transformed the U.S. car industry. The companies are already ranking among the leading U.S. homebuilders, with unique advantages such as pre-fabrication, reduced lead times, and superior construction quality.

Would you please comment on the latest news on Seven & i Holdings?

We maintain a positive outlook on the stock. This is consistent with the optimistic long-term view we expressed in August last year regardless of the eventual outcome from the latest series of acquisition offers. It is supported by several key considerations. “As much as we would like to see quick results from our investment, this one has an extremely long growth runway if Seven & i can run it well globally.”

Despite the recent withdrawal of the managed buyout offer by the founding Ito family, our optimistic view on Seven & i Holdings remains unchanged. There are two key reasons for this. First, the merger offer from Alimentation Couche-Tard Inc. (Couche-Tard) at $18.19 per share still stands as a valid option, which is significantly higher than the current share price. While there are regulatory hurdles, we believe they can be addressed with adjustments to the deal structure.

Regardless of the merger outcome, Seven & i’s management team is under significant scrutiny after the 2022 proxy fight, and we expect this to drive improvements in corporate governance and execution. The pressure on management to perform and deliver value to shareholders has never been greater, and this sense of urgency could result in accelerated operational improvements and strategic actions, enhancing long-term shareholder value.

Moreover, Seven & i operates in a highly fragmented U.S. convenience store market with significant growth potential through both organic growth and acquisitions. There are still many untapped opportunities, both domestically and internationally, that could drive future growth and increase the company’s market share. This, coupled with a solid financial position, makes the company an attractive long-term investment.

Finally, the events of the past year have shown the value of Seven & i, with persistent interest from Couche-Tard and other potential strategic or financial buyers. While the short-term news surrounding the MBO withdrawal and the volatility in share price may have created some uncertainty, we remain confident in the long-term potential of Seven & i Holdings. The company is well-positioned for growth, and we continue to view it as an attractive investment within the portfolio.

How do valuations in Japan compare to the U.S. and Europe?

Valuations in Japan are currently lower compared to the U.S. and Europe. Despite significant positive structural changes in the country, the Japanese stock market is still trading at relatively low multiples—around 14 to 15 times earnings, which is the same as it was 10 years ago. In contrast, the U.S. and Europe have higher valuation multiples. We believe this valuation doesn’t yet reflect:

1. Positive economic changes

2. Corporate governance reforms

3. Inflation emergence

4. Wage hikes

5. Shifting consumer mindset from savings to investments

Japan’s current valuation doesn’t yet fully capture the fundamental improvements happening in the market. While some markets may be cheaper, Japan is in a unique position, presenting a compelling investment opportunity. Japan’s price/earnings (P/E) could rise to 18-20 times in the next five years, which could provide additional returns to shareholders. With corporate profits expected to grow in the low to mid-single digits, shareholder return policies continuing to strengthen, and the potential for valuation multiple expansion, we believe Japan’s stock market holds the potential for double-digit annualized returns in the future.

What is your case for active investment in globally oriented Japanese equities?

We have always been drawn to Japanese companies with a strong international footprint, particularly due to Japan’s structural challenges in the past. These globally exposed companies have consistently demonstrated growth, increased their intrinsic value and share prices (such as long-term compounders like Keyence and Fast Retailing), regardless of domestic economic conditions. Their success on the global stage shows their resilience and appeal as investment opportunities.

In recent years, Japanese companies have significantly evolved, shifting away from traditional, domestically focused business models to become globally competitive and innovative enterprises. This transformation has created substantial opportunities for active investors who are well-positioned to identify undervalued companies with strong growth potential.

Japan has historically been a fertile ground for active managers to help generate alpha. In our view, Japan’s market inefficiencies—such as the language barrier, unique corporate culture, and slower information flow—create valuable opportunities for active management. Since the Fund’s inception in 2003, we have never been more optimistic about Japan. Today, Japanese companies are expanding their global footprint and leveraging Japan’s unique strengths in manufacturing, operational efficiency, and innovation to create substantial value. Active management can provide investors with the chance to capitalize on these opportunities by identifying undervalued stocks and tapping into their global growth potential.