MOST chief executives relish a jump in their company’s share price. But spare a thought for Volkswagen’s Matthias Müller as he watched the gauge of value leap by 4.5% on April 10th. That was galling because investors were responding to rumours, in effect promptly confirmed by VW’s board, that he was to depart this week after less than three years as head of one of the world’s top three carmakers.
The pensive Mr Müller, 64, rarely had the air of a man enjoying the limelight. His contract ran until 2020, but he had become increasingly frustrated at internal opposition to his efforts to change the way the company was run in the aftermath of “dieselgate”, a crisis sparked by VW’s rigging of car-emissions tests. To an outsider, changes such as more decentralisation and the sale of peripheral businesses hardly seemed controversial. But they were too much for some. He may be happy to go; the board referred to his “general willingness” to accept the pending management shake-up.
The supervisory board’s motivations are mixed. One is that a new face could help VW move on from dieselgate. Mr Müller, a long-serving insider, was installed in September 2015 to handle the furore. In the aftermath he faced a slump in sales of diesel cars, the jailing of staff in America and a bill of some $30bn (made up of fines and the cost of buying back vehicles from aggrieved consumers).
Mr Müller handled a difficult job competently. VW today is back to roughly the same financial shape it was in just before the scandal broke in mid-2015, with a market capitalisation of some €85bn ($105bn). Its share price has outperformed those of its peers. Last year it doubled profits and sold a record 10.7m vehicles.
Investors now want more than competence. As The Economist went to press, the most likely replacement was thought to be Herbert Diess, who was also expected to keep his current job as head of the VW brand. As a recruit from BMW who arrived only in mid-2015, he can be presented as an outsider untainted by VW’s old scandals.
As important is his reputation for keeping down costs. He has been effective in his handling of influential trade unions, and is likely to press for more efficient use of costly capital goods such as robots—the firm is notorious for investing heavily in them to little avail. Bernstein, an equity-research firm, wrote in January that “periodically, VW decides it needs to improve its competitiveness and profitability—and brings in an outsider to help it with this task.” It sees Mr Diess as the latest white knight, able to accelerate cashflow and profits.
The challenges are numerous, though. VW still needs to simplify its sprawl and focus on fewer brands. That is easy to say, but unions, fearing job losses among 640,000 staff, oppose any shrinkage. In December they blocked even Mr Müller’s modest sale of Ducati, an Italian motorcycle brand of no strategic importance.
Above all, the firm has to place a bet on the future of the car itself. Mr Müller had made it a priority to persuade shareholders, as well as engineers devoted to the internal combustion engine, that electric vehicles (EVs) are the way to go. He promised that VW would launch a new battery-powered car almost every month, from next year. In March VW said it would equip 16 plants (up from three) to build EVs in the next four years. It also says it has deals with suppliers for batteries worth €20bn. Such actions will not spare Mr Diess, if indeed he is the next boss, a huge strategic question: of all carmakers, should VW have the biggest electric ambitions?
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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