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September 25, 2015

Volkswagen and Japan's Fiasco

Japanese workers don’t have a lot of vacations. But they do have a lot of holidays, including three this week – “Silver Week.” So today, when they went back to work, all heck had broken lose around the world. And for the market in Tokyo, it was a big downhill slide.
They’d missed Wednesday’s dismal Chinese manufacturing data, which had fallen to the lowest level since the end of the Financial Crisis.
And they’d missed the Volkswagen fiasco that had metastasized to automakers and component makers around the world.
Any company dealing with diesels or Volkswagen or cars in general became a sell-off candidate, from automakers themselves to component makers and Volkswagen suppliers like Magna in Canada, whose stock has dropped 14% over the first three days this week.
Because of the fortuitously timed holidays, shares of Japanese companies were spared the selloff for the first three days of the week. Now the holidays are over. The Nikkei stock index plunged 498 points or 2.7% today, to 17,572. It’s down 16.1% from its Abenomics peak on August 10.
Volkswagen was blamed liberally. And Japanese automakers and component makers got hit hard – but not all, and the one with the most heft in the index got only dented.
Among the component makers that got clobbered was NGK. It makes a large variety of products, such as spark plugs and oxygen sensors, and among them diesel-related products, such as particulate filters. Its shares plunged 7.0%.
Denso Corp, a global component maker with an enormous breadth of products, makes diesel engine management systems – the kind of system that has been rigged in Audis and Volkswagens and possibly in other brands. Its shares plunged 5.2%.
Aisin Seiki, one of the world’s largest automotive component suppliers, makes just about everything from seat rails (involved in a Toyota recall of 6 million vehicles) to variable valve timing devices (subject of an antitrust criminal case in the US in which Aisin plead guilty and paid a $36 million fine) to large components, such as transmissions used with diesel engines in, among others, Jeep and Chrysler trucks. Its shares plunged 7.4%
Shares of automakers also curdled. Mazda plummeted 6.8%, Mitsubishi Motors 5.1%, Suzuki 4.1%, Honda 3.0%, and Nissan 2.5%. But the giant whose market capitalization accounts for about 1.7% of the index? Toyota shares dropped “only” 1.9%.
It didn’t help that today’s Flash Japan Manufacturing PMI was lackluster, with the critical sub-index for export orders plunging from 51.6 to 47.8 (below 50 = contraction), the worst drop in 31 months, based on “a sharp reduction in international demand.” The report added: “A number of panelists blamed a fall in sales volumes from China leading to a decrease in new exports. Subsequently, employment levels declined for the first time since March.”
So there’s more at play in Japan than just the Volkswagen fiasco.
Yet the Bank of Japan is still furiously buying Japanese Government Bonds (JGBs), Japanese equity ETFs, and Japanese Real Estate Investment Trusts (J-REITs) as part of its QQE program, to keep the mountain of government debt from collapsing and inflate the prices of stocks and real estate, all in one fell swoop.
Just before Abenomics became an economic religion at the end of 2012, the BOJ carried on its balance sheet ¥158.4 trillion in assets. By now, total assets have soared to ¥365.8 trillion. That’s $3 trillion in a $4.1 trillion economy. By comparison, the Fed sits on $4.4 trillion in assets in an $18 trillion economy!
But another huge buyer jumped into the market earlier this year with deafening fanfare and hype: the Government Pension Investment Fund (GPIF). It would dump a big portion of its JGB holdings into the bottomless pit at the BOJ and buy domestic and international assets with the proceeds. And 25% of its ¥141 trillion in assets ($1.17 trillion) would go into Japanese stocks. So GPIF gobbled up ¥35 trillion in Japanese stocks over the course of a few months.
Other Japanese pension funds followed its lead. The market soared. Hedge funds had been front-running the scheme, driving prices even higher, while emitting hype so thick you could cut it with a knife. And they rode up that gravy train to its August 10 peak. At about that time, the GPIF had finished switching 25% of its assets into Japanese stocks, and it stopped buying.
Hedge funds figured that out too and started selling. The Nikkei began to swoon, despite the BOJ’s relentless QQE.
Hiromichi Mizuno, the new CIO of the GPIF, is getting nervous. The fund must have already lost a chunk of money on the stocks it recently bought. And some of his fretting came to light at his first public appearance since taking the job in January.
“They have to prove the third arrow is working,” he said at a conference in Tokyo, referring to the schemes and structural changes that form part of Abenomics. “It’s a kind of moment of truth.”
The shift into Japanese stocks had helped bring in foreign investors, he said, but now the government needed to create a situation where these foreigners would be confident about Japanese stocks “without the sense of security that the GPIF is going to buy into the equity market.” And hopefully, the presence of these foreigners would finally give Japanese investors the confidence to invest in Japanese stocks for the long-term, he said.
But foreign investors jumped in to ride up the gravy train. A great ride. Many of them more than doubled their money in a couple of years. The Japanese watched from a safe distance. They’re a cynical bunch. They don’t readily believe in the rhetoric of their government.
Now the gravy train is rolling backwards. The Japanese have been through this before too. They don’t want to see their wealth, which is already being eaten up by the devaluation of the yen, get handed over to hedge funds so that they can take it and head for the exits.
Courtesy Wolf Richter www.wolfstreet.com

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Item Reviewed: Volkswagen and Japan's Fiasco Rating: 5 Reviewed By: EconMatters