Berkshire Hathaway Inc., led by Warren Buffett, sold 90 billion yen ($628 million) in yen-denominated bonds on Friday, marking its smallest yen deal to date.

The issuance took place in a market unsettled by an escalating trade war, yet Berkshire proceeded despite the volatility that led other Japanese firms, such as Suntory Holdings Ltd. and nissin foods Holdings Co., to cancel their own bond sales.

The offering included six tranches with maturities ranging from three to thirty years. All tranches carried higher yield premiums compared to Berkshire's previous yen note sale in October. Notably, the three-year notes, which comprised the largest portion of the deal, were issued with a spread of 70 basis points—up from 49 basis points in the prior sale. This increase reflects the challenging market conditions, as highlighted by Shunsuke Oshida, head of credit research at manulife Investment Management Japan: "Even if an issuer paid the maximum spread that it can offer, investors may not be able to buy in the current market condition. Although they want to increase their exposure, they would want to wait for the market to calm down."

The table below illustrates the rise in yield premiums across comparable tenors from October to the latest issuance:

Berkshire's decision to push forward with the sale underscores its confidence in the Japanese market, where Buffett has been active since 2019. His yen bond issuances have historically been closely watched, often boosting optimism in Japan's equity market due to his investments in the nation's trading firms.

Market Interpretation of the Deal

What Are Yen-Denominated Bonds?

Yen-denominated bonds are debt securities issued in Japanese yen. When foreign entities like berkshire hathaway issue these bonds to raise capital in Japan, they are often called "samurai bonds." In this case, Berkshire issued "global yen bonds," meaning they were offered to investors beyond Japan's borders. Foreign bonds serve various purposes: they allow issuers to circumvent unfavorable interest rates or economic instability in their home countries and diversify their funding sources. For comparison, bonds issued in U.S. dollars by foreign entities are known as Yankee bonds, while those in Chinese yuan are called panda bonds.

Why Is Berkshire Issuing Them?

The timing of this bond sale aligns with Berkshire's growing investments in Japan's five major trading houses: Mitsui & Co., Mitsubishi Corp., Marubeni Corp., Sumitomo Corp., and Itochu Corp. Since 2020, Berkshire has been building its stakes in these firms, recently increasing its ownership to nearly 10% in each, as foreshadowed in Buffett's February 2024 shareholder letter. Market observers believe the proceeds from the yen bonds are being used to further expand these holdings. Buffett himself noted in his letter, "Berkshire has financed most of its Japanese position with the proceeds from 1.3 trillion yen of bonds," reinforcing this strategy.

This move comes as interest rate dynamics shift. In 2023, Berkshire reaped significant investment income from U.S. Treasury bills, doubling its holdings in short-term Treasurys to $286 billion. However, the gap in long-term interest rates between the U.S. and Japan is narrowing. Concerns about an economic slowdown may prompt the U.S. Federal Reserve to cut rates, pressuring Treasury yields, while the Bank of Japan has indicated plans to raise rates, boosting yen appeal. This environment makes yen-denominated debt an attractive funding option for Berkshire.

How Does Current Market Volatility Factor In?

Global markets are turbulent, driven by Trump's wide-ranging tariffs, which have sparked fears of an economic downturn. For long-term investors like Buffett, however, market slumps can be opportunities to buy quality assets at discounted prices. By issuing yen bonds now, Berkshire secures funds to potentially increase its stakes in the Japanese trading houses at lower valuations, especially as it has negotiated with these firms to "moderately" relax a 10% ownership cap.

How Will It Affect Japan's Trading Houses?

On the day of the bond issuance, shares of the trading houses declined amid a broader market sell-off. Itochu Corp. saw the steepest drop at 3.7%, while Marubeni Corp. fell 1.5%. The Topix Wholesale Trade Index, encompassing these firms, slid over 2%. Historically, Berkshire's yen bond sales have lifted these companies' share prices, but the current trade war turmoil appears to have overshadowed this effect.

Despite the immediate downturn, Yasuhiro Narita of Nomura Securities suggests that trading houses may be more resilient than sectors like autos. "A rise in commodity prices will work in their favor, they don't have fixed costs like manufacturers, and they also have a diverse business portfolio," he said. This resilience could position them to benefit from Berkshire's continued investment over the long term.