How Would a Resurgence of Deflation in Japan Impact the Profits of These Companies?

Analysis of the Impact of Japan's Resurgent Deflation on Berkshire Hathaway's Investment in the Big Five Trading Houses

Japan's Big Five trading houses (Mitsubishi Corp., ITOCHU Corp., Mitsui & Co., Sumitomo Corp., and Marubeni Corp.) are key assets in Warren Buffett's investment portfolio. These diversified conglomerates operate across trading, resource development, retail, finance, and other sectors. A resurgence of Japanese deflation—characterized by persistent price declines, weak demand, and slowing economic growth—would impact their profitability in multiple ways. The analysis below examines this from both macroeconomic and specific business perspectives.

1. Macroeconomic Impact: Increased Overall Profit Pressure

Demand Contraction and Pricing Pressure: Deflation would cause consumers and businesses to reduce spending, further weakening domestic demand in Japan. Retail, consumer goods, and manufacturing-related businesses (e.g., ITOCHU’s textiles and food divisions) would face declining sales volumes and price wars, compressing profit margins.
Increased Debt Burden: Under deflation, real interest rates rise, relatively increasing corporate borrowing costs. With high debt ratios (especially in resource investments), profits may be eroded by higher financial expenses.
Yen Appreciation Risk: Deflation often coincides with yen strength, weakening export competitiveness and affecting overseas income from trading divisions.

2. Differential Impact on Specific Business Segments

Resource & Energy Segment (Moderate Buffer but Higher Volatility):
- Mitsui & Co. and Mitsubishi Corp. have significant investments in minerals and energy. Deflation could depress global commodity prices, squeezing near-term profits. However, if deflation triggers a global slowdown, diversification (e.g., LNG projects) may provide relatively stable cash flow.
- Potential upside: As a resource importer, Japan could see lower import costs, boosting profits in downstream operations.
Trading & Logistics Segment (Significant Negative Impact):
- Marubeni and Sumitomo Corp. rely heavily on international trade. Reduced global demand during deflation would lower transaction volumes and commission income, potentially decreasing profits by 10-20% (based on historical data).
Retail & Consumer Segment (Most Vulnerable):
- ITOCHU’s FamilyMart and other retail operations would suffer directly from reduced consumer spending. Falling prices could trigger cutthroat competition, further undermining profitability.
Finance & Investment Segment (Neutral to Negative):
- These trading houses generate income through equity investments. Deflation increases stock market volatility and investment return uncertainty, potentially leading to impairment losses.

3. Overall Profit Outlook and Risks

Short-Term Profit Decline: Historical data shows that during Japan’s previous deflation (1990s–2000s), trading house profits fell by an average of 15-30%. A recurrence could pressure EPS (earnings per share) for these companies in FY2024–2025.
Long-Term Resilience: Buffett favors these firms for their global footprint and dividend stability. High overseas exposure (≈50-70%) may cushion domestic shocks, but global deflation would amplify negative impacts.
Key Risk: A policy shift by the Bank of Japan (e.g., rate hikes) could intensify the deflationary cycle, further damaging corporate confidence.

Overall, deflation would primarily hurt profits through demand and pricing mechanisms, though diversification offers some protection. Investors should monitor Japanese economic indicators (e.g., CPI) and quarterly corporate reports to assess actual impacts.