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Warren Buffett’s Berkshire Hathaway made headlines in recent years by shifting focus to Japan, investing billions into some of the nation’s largest conglomerates, including Itochu and Mitsubishi (see Why is Warren Buffett reloading in Japan?). For Buffett, known for his cautious, value-oriented approach, Japan’s evolving corporate landscape presents a unique investment opportunity. This may be even more even so with the return of US President Trump, as new tariffs on China may benefit Japan through various channels, either by a reduction in the price of Chinese goods imported by Japan (see The Effects of Trump’s Trade War with China on Japan’s Trade) or by diverting American demand to Japanese goods. Adept Economics Director Gene Tunny learned about Buffett’s interest in Japan in his recent Economics Explored podcast conversation with Michael Useem, a Wharton professor and author of Resolute Japan: The Leaders Forging a Corporate Resurgence.

Japan’s Economic Journey: From Powerhouse to Lost Decades to Resurgence

Japan’s journey over the past few decades is a tale of highs and lows. In the 1980s, Japan seemed unstoppable, with innovations in manufacturing and technology that had the world on edge. However, the economic downturn in the 1990s, often referred to as the “lost decades,” marked a prolonged period of stagnation. The Tokyo Stock Exchange plummeted, banks struggled, and economic growth became sluggish (Figure 1). Japan’s formidable economy waned.

Fast forward to today, and we see an emerging story of revival. Professor Michael Useem, in his recent Economics Explored podcast episode with Gene Tunny, explained that this resurgence is not just a stroke of luck but the result of deliberate, innovative management practices by Japanese companies. In his new book, Resolute Japan, Useem highlights how Japanese firms reinvent themselves to navigate modern economic challenges, drawing attention from global investors, including Buffett.

Incidentally, Japan’s revival has not been painless, with many Japanese suffering under much higher inflation than usual, at least by Japanese standards, in recent years (Figure 2). This has had political repercussions, with the ruling Liberal Democratic Party losing its parliamentary majority in the late October election. 

The Resolute Japan Model: Tradition Meets Innovation

At the heart of Japan’s corporate renaissance lies the “Resolute Japan” model, a term coined by Useem and his co-authors to describe the blend of traditional values and modern management techniques that is powering this resurgence. Japanese companies are increasingly embracing “ambidextrous management,” a concept that allows them to leverage their core strengths while exploring new opportunities. This approach enables them to remain competitive and relevant in a rapidly changing world.

Two critical components of this model, which Useem discussed in the podcast, are the Gemba walk and lean production. The Gemba walk, famously practised at Toyota, involves executives visiting the front lines of their businesses to observe operations firsthand. By stepping out of their offices, leaders gain direct insights from employees and customers, helping them make informed decisions that fit real-world needs. Toyota’s lean production, another hallmark of Japanese management, is now a staple worldwide, underscoring the efficiency and discipline Japanese companies bring to their operations.

What’s especially compelling about Japanese companies is their dedication to stakeholders. Unlike many Western firms focused on shareholder returns, Japanese companies highly value stakeholder commitments, including employees, local communities, and suppliers. This people-centric approach has built resilient companies well-prepared to weather economic storms—a key factor attracting Buffett, who often prioritises companies with sustainable long-term visions.

Key Sectors Powering Japan’s Revival

Japan’s comeback isn’t confined to management strategies alone; it’s also evident in several key sectors where Japan is a global leader. Michael Useem highlighted in the podcast that Japanese firms dominate sectors such as semiconductor materials, automotive components, and robotics, which are vital to modern manufacturing and technology. For instance, Japanese companies control 60% of the global market for silicon wafers, a critical material for semiconductor production. They also lead in bearings, high-tech glass, and various automotive technologies, making Japan an essential player in global supply chains.

Japan’s corporations are also expanding into newer, promising industries. Companies like Panasonic are shifting resources from their traditional consumer electronics business to renewable energy, electric vehicles, and digital services. Useem explains this as part of Japan’s “ambidextrous” approach, which balances operational expertise with forward-looking innovation. By retaining and revitalising their traditional industries, Japanese firms are enhancing their positions in the global market, further boosting their investment appeal.

Warren Buffett’s Investment Thesis on Japan

For Warren Buffett, Japan represents an ideal investment opportunity. His strategy has always focused on stable companies with strong fundamentals, and Japanese firms have traditionally been conservative with a focus on resilience. The recent resurgence of the Japanese stock market, bolstered by these revitalised corporations, signals that Japan’s companies are now primed for long-term growth. Buffett’s interest in firms like Itochu, Sumitomo, and Mitsubishi aligns well with his value-investing approach, as these conglomerates have deep roots in industries ranging from energy and metals to finance and real estate.

Buffett’s Japanese investments also underscore the appeal of Japan’s unique management philosophy. By maintaining a multi-stakeholder focus, Japanese companies minimise the risks of sudden market shifts, offering a more stable investment option. Unlike some U.S. companies, which prioritise short-term gains for shareholders, Japan’s approach resonates with Buffett’s preference for long-term value creation.

Japan’s Investment Landscape: Growth Potential and Challenges

While Japan’s corporate renaissance is creating enticing investment opportunities, challenges remain. Japan’s aging population and relatively low business dynamism remain potential obstacles, as the OECD pointed out in its 2024 Economic Survey. Despite these demographic hurdles, Japan’s emphasis on innovation and strategic adaptation fosters growth in the private sector. The government is also enacting reforms to bolster economic competitiveness and encourage entrepreneurship, further strengthening the investment landscape.

The Japanese government’s pro-business policies have helped in this transformation. Corporate governance reforms, which aim to improve board accountability and transparency, attract foreign investors who are increasingly optimistic about Japan’s future.

As Professor Useem suggested in the podcast, Japan’s approach could inspire companies worldwide. Useem encourages leaders to “take a Gemba walk” in Japan, observing firsthand the management principles that have powered its resurgence. By learning from Japan’s unique approach, international companies may discover how better to align their strategies with a rapidly evolving global market.

Conclusion: The Long-Term Appeal of Japan’s Resurgence

Warren Buffett’s investment in Japan is more than just a financial decision. It is a vote of confidence in a resolute and resurgent nation. Japan’s corporate revival, driven by innovative leadership and an unwavering commitment to stakeholder value, is reshaping its position in the global economy. Buffett’s move signals that Japan’s economy is resilient and offers a model of resilience and adaptability that other economies might learn from.

Published on 7 November 2024. For further information, please email us at contact@adepteconomics.com.au or call us at 1300 169 870.