Japanese government bond yields reduced their decline, while the yen maintained its gains for a short period following the Bank of Japan’s decision to keep the key interest rate unchanged, on Friday, as was widely expected, before it later gave up its gains to stabilize against the dollar.
Japanese stocks remained severely depressed, largely ignoring the central bank’s decision, amid mounting concerns about the sustainability of spending on artificial intelligence, after the results of major companies, including Alphabet and Amazon.com, showed a significant depletion of liquidity, which reinforced the wave of selling in technology stocks, according to Reuters.
The dollar fell by 0.2 percent to 157.425 yen by 03:44 GMT, after the yen recorded a brief rise to 157.115 against the dollar, before giving up its gains and later settling at about 157.67 yen. The temporary improvement in the performance of the Japanese currency came after the Bank of Japan raised its inflation expectations during the next fiscal year to 2.6 percent, from 2.4 percent, in addition to a member of the Board of Directors’ objection to the decision to fix the interest rate and called for it to be raised.
The 5-year Japanese government bond yield fell by 3 basis points to 2.24 percent, after recording a low of 2.22 percent earlier in the day. No other monetary bonds witnessed trading after the interest decision was issued.
Benchmark 10-year Japanese government bond futures rose by 0.37 yen during the day, to 126.61 yen, after earlier recording a rise of 0.64 yen.
The Nikkei 225 stock index fell by 2.4 percent to 63,092.15 points, affected by losses in technology and electronic chip companies' stocks, while concerns about the feasibility of huge investments in artificial intelligence put pressure on investor morale.
The Bank of Japan kept the key interest rate at 1.25 percent, abandoning raising it for the second time in a row, to allow more time to evaluate the effects of previous increases in interest rates on lending conditions.
The central bank raised its inflation expectations and indicated its vigilance about the upward risks to prices, hinting at the possibility of raising borrowing costs as early as December. He also indicated that his monetary policy has entered a more stringent phase, allowing room for raising interest rates once every few months.
Hajime Takata, a member of the Board of Directors of the Bank of Japan, known for his strict orientations, disagreed with the decision to keep the interest rate unchanged, proposing to raise it to 1.5 percent, but his proposal was not approved.
The US Federal Reserve, the European Central Bank, and the Reserve Bank of New Zealand also kept interest rates unchanged, in decisions issued during the week, amid continued high levels of inflation and tightening financial conditions. However, market expectations indicate that the global monetary tightening cycle has not yet ended, in light of the continued rise in energy prices and the escalation of risks associated with the conflict in the Middle East.
“Following the example of the Federal Reserve and the European Central Bank, the Bank of Japan has little reason to rush, especially since the US midterm elections may add volatility to currency and bond markets,” said Masahiko Lo, chief fixed income strategist at State Street Investment Management in Tokyo.
He added that Bank of Japan Governor Kazuo Ueda “can continue to rely on the data, keep the option of raising interest on the table at every meeting, and postpone the next increase until a period close to the beginning of the year.”
In a surprising move, the Bank of Japan also announced that it would accelerate the pace of selling exchange-traded funds, starting in January, bringing the value of annual sales to 860 billion yen ($5.45 billion), compared to the current level of 330 billion yen.
“It is unhealthy for the central bank to hold such a large amount of stocks, but I am not sure the timing was right in light of the risk-off atmosphere,” said Toru Sasaki, chief strategist at Fukuko Financial Group and a former Bank of Japan official. “I feel somewhat concerned about the reaction of the Japanese stock market in the coming period.”
In currency markets, the dollar was subjected to additional pressure due to the decline in US Treasury bond yields, as investors turned to safe assets, following a new wave of selling in shares of technology companies. The 10-year US bond yield fell to 4.8958 percent, while the 30-year bond yield fell to 5.2623 percent, both recording their lowest levels in more than a month.
Shares of traditional automakers in Europe rebounded thanks to the business results announced this week, but a full recovery is still far away, as market shifts and declining competitiveness cast a shadow over the long-term prospects of the sector.
Volkswagen, Stellantis, and Renault were able to stop the sharp decline in their shares, while intensifying their efforts to restore investor confidence, whether through launching new electric models or implementing radical restructuring measures.
But as Chinese competition intensifies and technological changes reshape the sector, investors are increasingly skeptical about the ability of established European car companies to regain the levels of profitability and market valuations they once enjoyed.
“There is a great deal of skepticism about the sector,” said Massimo Baggiani, of Netish Asset Management in London, whose portfolio includes shares in Renault, BMW, Mercedes, Volkswagen, and Stellantis.
He added: “At this stage, it is difficult to identify a clear factor that can stimulate a sustainable recovery in the long term.”
The sector calls on Brussels for support
The European auto sector index is trading near levels not seen since late 2020, when the “Covid-19” pandemic led to disruption of global supply chains and a decline in demand.
European automakers are currently seeking to catch up with their Chinese counterparts, such as BYD and Geely, which have made great progress in transitioning to electric cars and have set new standards in terms of cost competitiveness and software technology.
In 2021, when Volkswagen shares reached their peak, the share of Chinese car companies in the European market was small. But by the middle of this year, this share exceeded 10 percent. During the same period, Volkswagen's market value declined by about three quarters, under pressure exacerbated by customs duties problems.
“The economic fundamentals of the sector, in terms of competitive pressures, are getting worse,” said Philippe Houchois, an analyst at Jefferies. He added: “Chinese companies occupy a very large share in their domestic and foreign markets, which does not provide investors with a clear vision of the level at which the decline may stop.”
Facing pressure from low-cost Chinese imports, Volkswagen, Stellantis, and Renault requested Brussels' help, in conjunction with negotiations on proposed incentives for local manufacturing.
Renault CEO, Francois Provost, told Reuters: “Financial markets see that if Europe does not take an urgent decision to support the auto sector, Chinese companies will continue to supply cars to Europe, and in the end this sector will die.” He added: “That is why I tell the European Union that it is urgent to take a decision.”
AI investments drain liquidity
Some investors believe that the wave of decline in car company stocks has exceeded its limits. Despite years of falling stock prices, Volkswagen, Stellantis and Renault still own huge industrial assets and maintain balance sheets that look better than those of many companies with higher market valuations.
“Huge amounts of capital are flowing into AI companies and stocks, draining money from other sectors,” Baggiani said. As a result, sectors facing difficulties, such as the automobile industry, are being hit more than they should be.”
Car companies are also making increasingly radical changes in an attempt to regain investor confidence.
Volkswagen has begun the largest restructuring process in its history, which includes plans to cut about 100,000 jobs and the possibility of closing factories in Germany. As for Stellantis, which owns brands that include Fiat, Peugeot, and Jeep, it is counting on regaining its momentum through a group of new models, renewing its brand strategy, and establishing partnerships with Chinese automakers.
Recent work results have provided a glimpse into the potential behind these plans. Investors' confidence in Stellantis' ability to exceed its cost-cutting targets contributed to its stock rising by 15 percent during one session, on Wednesday, following the announcement of third-quarter results. Volkswagen and Renault shares also recorded a slight increase after falling to their lowest levels in several years.
But this improvement may only buy companies some time to confront structural changes, according to Houchoa. “The result is that the sector is turning into something like a zombie corporate sector,” he said. “It is still alive, but it is dying, and it can continue that way for a long time.”
