Best Idea Show - Jeremy Schwartz, Jesper Koll, WisdomTree - Japan Is Trading At The Lowest Valuation In 30 Years | #256

Episode Summary

Executive Summary: The episode makes a bullish case for Japanese equities, arguing that valuation is compelling, corporate governance has improved, and shareholder returns are rising via dividends and buybacks. The guests emphasize Japan’s generational investing shift, the catalytic role of Buffett’s trading-company purchases, and the appeal of currency-hedged exposure through diversified ETFs like DXJ.

Main Topics: Why Japanese stocks are attractive now (Priority: 5/5): Japan is presented as a deep-value market trading at low relative valuations after years of underperformance, with appeal driven by cheap cash-flow metrics and potential global cyclical recovery. Buffett’s stake in Japanese trading companies (Priority: 5/5): Warren Buffett’s purchases of five large Japanese trading companies are interpreted as a powerful signal of confidence in Japan’s value proposition and shareholder-friendly evolution. Corporate governance reform in Japan (Priority: 5/5): The discussion highlights a major shift from insider cross-shareholding culture toward higher ROE, stronger capital discipline, and more dividends/buybacks pushed by domestic institutions like GPIF. Generational change in Japanese investing behavior (Priority: 4/5): Older Japanese investors remain risk-averse due to the bubble collapse, while younger generations are increasingly embracing equities and real estate as deposits and pensions look insufficient. Currency hedging and implementation (Priority: 4/5): WisdomTree’s Japan ETFs are positioned as currency-hedged ways to access Japanese stocks, reflecting the view that investors should isolate equity exposure rather than add an incidental yen bet. Trading companies, China exposure, and inflation hedging (Priority: 4/5): The trading companies are described as cyclical, globally diversified businesses that offer inflation protection, M&A/venture access, and leverage to China-linked demand and supply-chain shifts. Japan beyond mega-cap narratives (Priority: 3/5): The guests note overlooked opportunities in small- and mid-cap Japan, where profitability, IPO performance, and valuation can be compelling even without a 'superstar' tech story.

Key Arguments: Japan offers one of the lowest valuation entry points in decades, making it attractive even before any macro improvement. Buffett’s investment in Japanese trading houses validates Japan as a value market and highlights companies with strong cash generation and shareholder returns. Corporate Japan has changed materially: cross-shareholdings have collapsed, management is more accountable, and return on equity is now a central focus. Japanese companies are increasingly returning cash through dividends and buybacks, creating a meaningful total shareholder yield. The younger generation in Japan is beginning to invest more actively, driven by low deposit yields and concern about future pensions. Currency-hedged Japanese exposure can improve diversification by removing an unpredictable yen bet from the equity thesis. Japanese trading companies provide diversified exposure to commodities, project finance, venture capital, and international trade, especially around Asia and China. Japan’s market opportunity extends beyond large caps, with small/mid caps and IPOs also showing strong relative performance.

Data Points: Japan valuation: lowest valuations in 30 years - Used to frame current attractiveness of Japanese stocks relative to history. Buffett investment size: $6 billion - Referenced as Buffett’s commitment to Japanese trading companies. Japanese trading company stake: between 5% and 10% - Estimated ownership range in the five trading houses. Trading company price-to-cash-flow yield: around 25% - Cited for Buffett’s five Japanese trading companies (about 4x price-to-cash-flow). DXJ price-to-cash-flow yield: 20% - Described as the approximate cash-flow yield for WisdomTree’s Japan ETF basket. DXJ dividend yield: 3.5% - Dividend yield cited for the Japan ETF basket. DXJ net buyback yield: 1.4% - Net buyback contribution in the Japan ETF basket. DXJ total shareholder yield: about 5% - Combined dividends and buybacks for the Japan basket. US dividend yield: 1.8% - Referenced as the S&P 500 dividend yield around July. US net buyback yield: 1.8% - Referenced as the S&P 500 net buyback yield around July. US total shareholder yield: 3.6% - Combined US dividends and buybacks cited in the discussion. Cross-shareholdings: down from slightly over 50% of market cap to 4% - Shows the structural shift in Japanese corporate ownership and governance. GPIF account growth: more than threefold increase in new accounts - Retail direct brokers saw a sharp rise in new accounts over the last year. Traditional vs direct broker inflows: direct brokers collecting client money at about twice the rate - Indicates growing self-directed Japanese investing. Tokyo apartment affordability: within a 45-minute commute from downtown Tokyo - Claimed to be affordable on a Starbucks-average salary in Tokyo. Interest rate shift after bubble: 3% to 8% within six months - Described as the deliberate tightening that burst Japan’s late-1980s bubble. Japanese bubble peak: Nikkei near 40,000 - Marked the peak before the bubble burst. Japanese companies at historic highs: almost 15% - Share of Topix companies trading above prior bubble-era highs. Japanese IPO performance: 120 IPOs this year; every one trades at least 200% above issue price - Used to illustrate strength in Japan’s small/mid-cap and new-issue market. Russell 2000 unprofitable share: 30% to 32% - Compared to Japan small caps to show relative quality differences. Russell 2000 total shareholder yield: about 0.5% - Contrasted with Japan’s higher shareholder returns. Japan small-cap total shareholder yield: almost 4% - Combined dividends and buybacks cited for Japan small caps. Japan small-cap P/E: below 13x - Used to contrast with expensive US small caps. US small-cap P/E: around 30x - Compared unfavorably with Japan small caps.

Pivotal Quotes: "Japan is trading at the lowest valuations in 30 years." — Jeremy Schwartz: Core valuation argument for the Japan thesis. "The cross-shareholdings have broken down. They went from slightly over 50% of the market cap in the early 90s and down to 4%." — Jesper Koll: Explains the structural governance transformation in corporate Japan. "You can get a basket of Japanese companies... and we think Japan is a good place to be." — Jeremy Schwartz: Summarizes the investment case for broad, diversified exposure.

Implications: For investors, Japan offers a rare mix of cheap valuations, improving governance, and rising shareholder returns. The best expression may be currency-hedged, diversified exposure rather than picking only a few names; catalysts include earnings revisions, global growth, and continued reform.