One of the greatest risks in investing in Japanese stocks is 'yen exchange rate risk'. How does Warren Buffett hedge against this risk?

Warren Buffett's Strategy for Hedging Yen Exchange Rate Risk

When investing in Japanese stocks (such as the five major trading houses: Itochu, Mitsubishi, Mitsui, Marubeni, and Sumitomo), one of Warren Buffett's primary risks was yen exchange rate risk—fluctuations in the yen against the U.S. dollar could erode the value of his investments. To hedge this risk, Buffett employed the following ingenious strategy:

1. Financing Through Yen Bond Issuance

• Berkshire Hathaway, Buffett's company, issued yen-denominated bonds, borrowing yen at extremely low interest rates (even near-zero rates).
• The borrowed yen was directly used to purchase Japanese stocks. Thus, both his investment assets (stocks) and liabilities (bonds) were denominated in yen.

2. Exchange Rate Hedging Mechanism

• If the yen appreciates: The value of Japanese stocks (in USD) rises, but the value of bond liabilities also increases, offsetting each other with minimal net impact.
• If the yen depreciates: The stock value (in USD) decreases, but the bond liability value also declines proportionally, thereby hedging losses.
• This "asset-liability matching" approach creates a natural hedge, avoiding complex derivatives (like forex futures or options) for risk management.

3. Strategic Advantages

• Low-Cost Financing: Japan’s low-interest environment allowed Buffett to borrow at minimal cost, effectively using "free" funds to invest in high-dividend Japanese stocks.
• Long-Term Focus: Emphasizing value investing, Buffett ignored short-term exchange rate volatility, concentrating instead on company fundamentals and dividend returns.
• Real-World Results: Since 2019, Buffett gradually invested in the five major trading houses, acquiring ~9% stakes. This strategy effectively shielded him from potential losses during the yen’s sharp depreciation (over 20% against the USD in 2022–2023).

This strategy reflects Buffett’s investment wisdom: rather than directly combating risk, he transforms it into opportunity through structured financing. Investors seeking to replicate this approach should consider market conditions and their own risk tolerance.