Many see Japan as a value play. The real opportunity is its high number of quality companies (250+ with >40% gross margins) that were historically mismanaged. Ongoing governance reforms are now unlocking the potential of these high-margin franchises.

Buffett's investment in Japanese trading houses was more than a value play; it was a masterclass in financial engineering. He financed the purchases by issuing yen-denominated debt at a near-zero interest rate. This created a carry trade where the substantial dividend income became almost pure, risk-mitigated profit.

For years, Japan was a value trap: cheap companies with poor governance hoarded cash. The game changed when Prime Minister Shinzo Abe introduced stewardship and governance codes, creating a top-down, government-backed catalyst for companies to finally improve capital allocation and unlock shareholder value.

Facing a massive tax bill on his appreciated Coca-Cola stock in the late 90s, Buffett used Berkshire's then-expensive stock as currency to merge with bond-heavy insurer General Re. This move diversified his portfolio into safer assets that rallied when the tech bubble burst, all without incurring taxes from a direct sale.

Japan sustains a debt-to-GDP ratio that would cause collapse elsewhere due to its unique culture. Citizens patriotically buy and hold government debt, preventing the market panic that would typically ensue. This cultural factor allows it to delay an economic reckoning that seems inevitable by standard metrics.

Investors fixate on Japan's high sovereign debt. However, Wagner points out that the central bank owns a large portion. More importantly, the corporate and household sectors are net cash positive, making the overall economy far less levered than the single headline number suggests.

Buffett strategically used Berkshire's and Coca-Cola's inflated stock prices as currency to acquire Gen Re. This swapped his overvalued equity risk for Gen Re's stable bond portfolio, which acted as a ballast and protected Berkshire during the subsequent market crash. He allowed the deal to be publicly perceived as a mistake, masking its strategic genius.

Investors often incorrectly lump all Asian credit into a high-risk bucket associated with emerging markets or distressed property. This misperception creates undervalued opportunities in high-quality liquid markets, such as Japanese financials, which offer relative value without significant incremental risk.

As investors sell US assets to repay strengthening yen loans, it pulls liquidity from the US system. If this happens slowly, it could gently deflate inflated stock prices without causing a crash. This orderly withdrawal is preferable to a sudden market rupture caused by bursting bubbles.