Warren Buffett has $7 billion riding on Japanese stocks. He trashed them as bad investments in 1998

• Warren Buffett's Berkshire Hathaway recently revealed 5% stakes in Japan's five largest trading houses: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.
• The famed investor blasted Japanese businesses in 1998, highlighting their lack of earnings power and low returns on equity.
• "We're quite a bit less enthused about those stocks as being any kind of obvious bargains," Buffett said at Berkshire's shareholder meeting that year.
• "Corporate governance, profit margins, and business structures are like night and day since then," John Vail, chief global strategist at Nikko Asset Management, told Business Insider.

Warren Buffett seems to have warmed to Japanese stocks, more than 20 years after dismissing them as inferior investments.

The famed investor's Berkshire Hathaway conglomerate recently disclosed it had taken 5% stakes in all five of Japan's biggest trading houses or "sogo shosha": Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

The bets, worth a combined $7 billion at the close of trading on Thursday, mark a reversal of Buffett's stance at Berkshire's annual meeting in 1998.

"We're quite a bit less enthused about those stocks as being any kind of obvious bargains," Buffett replied to a shareholder's question about whether he saw value in Japanese equities.

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"Earnings have been poor for a great many Japanese companies," he continued. "Returns on equity are very low," he added, referring to the ratio of net income to shareholders' equity.

"It's extremely difficult to get rich by owning a business that earns a low return on equity," Buffett added. "Even if you buy it cheap to begin with."

Berkshire was no longer interested in "cigar butt" investing, or seeking out "pathetic" companies with "one good free puff left," Buffett said.

"Time is the enemy of the poor business, and it's the friend of the great business," the Berkshire chief said. His company's focus on long-term investing required it to "stay away" from businesses with low returns on equity, he added.

Moreover, Buffett's business partner and Berkshire's vice chairman, Charlie Munger, flagged the difficulty of judging company cultures in foreign countries. He gave the example of a business that might care more about serving a particular community than its shareholders.

However, Munger wisely left the door open to Japanese investments in the future.

"I suppose anything could happen," he said. "After all, we bought silver. But we have never made a big sector play on a country. In fact, we've almost never made a big sector play."

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Berkshire's bets on five Japanese trading companies show Buffett and Munger have changed their minds since then. They're right to do so, John Vail, chief global strategist at Nikko Asset Management, told Business Insider.

"Japan is extremely different now than in 1998," he said. "That was even before Koizumi, not to mention Abe," he continued, referring to former Prime Minister Junichiro Koizumi and current Prime Minister Shinzo Abe.

"A few things remain the same, but corporate governance, profit margins, and business structures are like night and day since then," Vail added.