Berkshire Hathaway Plays the Yen Carry Trade – The Right Way
Berkshire Hathaway Plays the Yen Carry Trade—the Right Way

        
        




  


  



  



  


    

  
        
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    The company helped finance the sizable purchase of stock in a group of Japanese trading companies with yen-denominated borrowings.

      

 







    

 One of the bigger participants in the so-called yen carry trade is Berkshire Hathaway, which helped finance its sizable purchase of stock in a group of Japanese trading companies with yen-denominated borrowings.  The yen carry trade often involved investors borrowing funds in Japanese yen at low rates of 1% or so and then using those funds to invest in higher-yielding currencies, bonds, or equity investments. That trade went awry recently as the yen rallied sharply and stocks worldwide declined.  Berkshire...



      One of the bigger participants in the so-called yen carry trade is

        Berkshire Hathaway
          ,

      which helped finance its sizable purchase of stock in a group of Japanese trading companies with yen-denominated borrowings. 

      The yen carry trade often involved investors borrowing funds in Japanese yen at low rates of 1% or so and then using those funds to invest in higher-yielding currencies, bonds, or equity investments. That trade went awry recently as the yen rallied sharply and stocks worldwide declined. 

       Berkshire accumulated 5% stakes in five Japanese trading companies in 2020—since increased to 8% each—that now have a total market value of $20 billion. Berkshire opted to use yen borrowings to hedge its currency risk. 

      That has been a smart move by CEO Warren Buffett since the yen has fallen about 40% since then. But Berkshire has been stung by the more recent rally in the yen and drop in the Japanese stock market. 

      Berkshire, unlike many leveraged traders who borrowed in yen and invested in other financial assets, has staying power since its nearly $10 billion of yen debt extends out as far as 2060 in maturity.

      

      The

        yen
          

      has recently rallied 6% to about 144 yen to the dollar. That has helped depress the Japanese stock market, with the

        
          Topix

      index down 13% this month.

      The five Japanese trading companies owned by Berkshire have come under pressure lately too, but Berkshire probably has doubled or tripled its money in those stocks. The five companies are

        Itochu
          ,

        Marubeni
          ,

        Mitsubishi
          ,

        Mitsui
          ,

      and

        Sumitomo
          .

      

      And Berkshire has protected itself from yen depreciation by issuing the yen debt. Otherwise, it would have seen its gains in the Japanese stocks partly eroded by currency losses. In essence, Berkshire financed the purchase of the stocks with the cheap yen debt, which costs Berkshire just under 1% annually on average. 

      

      Here’s how CEO Warren Buffett described the investment at Berkshire’s 2023 annual meeting:

      Well, the Japanese thing was simple. I mean, I like looking at companies. I mean, I like looking at figures about companies. And there were five very, very substantial companies, understandable companies.” And so here they were, they were sitting as a group where they were earning, well, say, 14% on what we were going to pay to buy them. They were paying decent dividends. They were going to repurchase shares in some cases. They owned a whole bunch of businesses that we could understand as a group. And at the same time, we could take out the currency risk by financing in the end, and that was going to cost us to 0.5%. Well, to get 14% on one side to 0.5% on the other side, and you’ve got money that—forever. And they’re doing intelligent things, and they’re sizable, so we just started buying them.”  Buffett essentially said that Berkshire was getting an earnings “yield,” or inverse of the companies’ price/earnings ratio, of 14%. That corresponds to a P/E of about 7. And Berkshire was paying just 0.5% for the borrowings to effectively finance the investment.

      Berkshire’s earnings, however, could take a hit in the third quarter from the yen’s strength since its borrowings get revalued each quarter. Berkshire has reported a $1 billion noncash gain in the first half of this year from currency movements largely driven by the yen’s drop and could suffer a similar loss in the third quarter if the yen holds current levels.

      

      Investors often strip out the paper currency gains and losses at Berkshire because they don’t affect its underlying operating profit.

      Write to Andrew Bary at andrew.bary@barrons.com

      



  


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