2020: Toyota's Shareholder Meeting

September 26 2016

The year is 2020. The self-driving car has not delivered on its promise yet. Neither in Japan. It is June 16 in Tokyo, the day of the annual shareholder meeting of Toyota. Akio Toyoda still holds the reins at Toyota. A casual observer who predicted a wave of innovation in the automobile industry is in for a disappointment. At least, in Japan. Toyota has been complacent. Its newest models look almost the same as five years ago; sales are without exception disappointing. Multiple problems have surfaced over the past few years. It seems like everyone at Toyota has other things on their minds than producing cars. Dysfunctional airbags, sometimes unexplainable breakdowns and other production flaws are everyday events. This is why.

Where Is Everyone?

While chief executive officer Akio Toyoda takes a seat, he takes a look around. He sighs. “Four years back we still had shareholders.” Of course, Toyota officially still has shareholders. However, the majority shareholder is by large the Japanese central bank. The so-called Bank of Japan bought almost all outstanding shares of Toyota over the past four years. A real shareholder, or real shareholders, is no longer to be found.

Akio Toyoda acquiesces in the recent changes. “What can I do about it?” he asks rhetorically. Akio Toyoda also sold some shares to the Bank of Japan, his broker told. “They will make a bid no matter what the asking price is.” Thousands of traders are dedicating their time to anticipating any purchases by the central bank. The tradition of the annual shareholder meeting is changing rapidly into a puppet show. It no longer has anything to do with corporate governance.

Although Akio Toyoda is hesitant to speak out in public, he admits that he sees no evil in adopting an increasingly lavish and expensive lifestyle. The fleet of RJR Nabisco (famous makers of those delicious Oreo-cookies), which is also jokingly called the “RJR Air Force” on some occasions, pales in comparison with the jets of Akio. “A modern requirement to react swiftly,” Toyoda calls them. Over the past few years the salary of Toyoda has tripled, aside from all the other perks he receives. Even while Toyota´s earnings have halved three times. “The Bank of Japan doesn’t care anyway.”

In the Dealing Room at the Bank of Japan

The department responsible for implementing monetary policy is gradually turning into a dealing desk of a giant hedge fund. But without the yelling. After all, nobody cares which price is paid for a given share. As long as the share is bought. Price formation is a “thing of the past.” "Genuine" investors simply deflected to countries where a stock market still exists.

Moreover, the Bank of Japan never sold any share. As soon as a stock is bought, no central bank employee ever takes a look at it again. “Who cares anyway. It’s not as if we’re going to sell those shares anytime soon.” Company ownership, unlike bonds, has no fixed duration.

The Bank of Japan often opts for ETF’s, index funds that include all the shares listed on the Nikkei-index. “It saves us a lot of work,” a central bank employee explains. For the fund managers of the index funds which the Bank of Japan buys these are good times. Assets under management (AUM) of these index funds grow billions a year. Plenty of reason to pamper central bank employees: golf tournaments, bottles of the finest champagne and expensive dinners.

Investor Relations for … Investors?

The heavily downsized “Investor Relations” department of Toyota still publishes the proposed agenda ahead of the annual shareholder meeting. Nobody actually remembers why, but that is what an “investor relations” ought to do. The legal department, in contrast, has quadrupled in size. The success of Toyota appears to increasingly depend on political favors and navigating through a web of even more complex regulations than before – both financial as labor-related. Some Toyota-employees that in the past answered questions and inquiries of private investors – speculating with their own and not other people’s money – now answer questions of supervisory bodies. “Quite a change.” Friendly phone calls are no longer part of the deal, only e-mails signed off with “Sincerely.”

The Japanese Suffer

For the first time since a very long time, generations grow up that are economically worse off than earlier generations. Incomes are lower, and even in Japan inflation has picked up. “Repressed inflation,” as one of my colleague-economists would call it. For years, because the consumer price index did not increase, the Bank of Japan fostered a giant bubble in (government) bonds and a staggering public debt burden.

In the meanwhile, the Japanese central bank owns almost all outstanding public debt. After the Bank of Japan began setting an interest rate cap of 0% on the 10-year government bond in 2016, today almost every point on the yield curve is capped at 0%.

The yen, however, is bleeding. It has collapsed. The Japanese population suffers. Some import goods are now a few dozen percentage points more expensive. Only housing and rents are getting cheaper. And of course not because things are going so well. Employment is no problem, but making ends meet is. On top of that, pensions are not indexed for inflation and every year large parts of the pensioners’ wealth simply evaporate because of the purchasing power loss of the yen. The big boss of the Japanese Government Pension Investment Fund (GPIF), once the biggest pension fund in the world, even decided to take his own life. He could not live with the “biggest heist in the history of the world.”

Fiction or Reality?

Last week the Bank of Japan decided to renounce its inflation target of max 2%. The BoJ no longer guards the stability of the value of its currency, one of the main objectives of a central bank. Even though the Keynesian monetary illusion has failed us over the past decades, every central bank still swears by this recipe. Each and every central bank around the world has engaged in the biggest monetary experiment in the history of the world, while due to the struggle of the Japanese we know that this road heads nowhere.

Not only did the Bank of Japan swear to keep doing what it is doing if inflation exceeds 2%, but moreover decreed a price ceiling: the interest rate on 10-year Japanese government bonds may not exceed 0%. The “nationalization” of the yield curve is a fact. A disastrous development.

U.S.-based investor Kyle Bass has been pessimistic on the Bank of Japan for a while, and even on all other Western central banks. He shorts the Japanese yen and Japanese public debt. One of both will break down, his thesis says. And I can guarantee you: not only in Japan will one of both collapse, but in Europe and the United States too.

It happens to be that the Japanese central bank tends to precede other central banks in the extremeness of their policies. Even though the above narrative remains fiction for now, the probability seems to be high that the above scenario will unfold as long as central banks keep doing what they are doing: unleashing the largest monetary disaster in the history of Western civilization.

Toyota will not be the only case in point, but will be one of the sad symptoms of the economic destruction which the Bank of Japan is causing.

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