Japan: Caution should be used in ascertaining the economic effects of the Brexit – Nomura

Research Team at Nomura, suggests that the outcome of UK referendum was not expected by them, but they think the effect on the Japanese economy should be considered with caution.

Key Quotes

“We think the UK economy faces a risk of falling into a recession as a result of a declining pound and higher inflation. The UK accounts for roughly 4% of the global GDP, and we think the effect on the global and Japanese economies of a reduction in trade is minimal.

In the near term we will be paying the most attention to the potential for concerns to arise over the creditworthiness of UK financial institutions owing to a lack of liquidity resulting from difficulty borrowing US dollars and other foreign currencies. Another concern is that the adverse effect on the Japanese economy could widen as Japanese companies scale back capex plans out of concern that production activity will no longer be profitable in Japan, if USD/JPY stabilizes below 100.

We think policy responses to such risks include, first, central banks acting in concert to provide liquidity to markets, mainly in the form of US dollars, on an emergency basis, and second, intervention in forex markets to protect the pound and in response to sharp movements in other currencies.

If the Ministry of Finance in Japan were to intervene in the currency market, we think this could be coupled with an extraordinary monetary policy meeting at the Bank of Japan to implement additional monetary easing measures on an emergency basis. If financial markets were to be reassured by such steps, we think the effect on the Japanese economy of Brexit would be minimal.

From a slightly longer perspective, we think the potential for a credit crunch at major UK banks as a result capital erosion caused by recession and declines in real estate prices in the UK warrants caution. However, given the high capital adequacy ratio of major UK banks, the likelihood of this happening is low.

Another concern is that other countries will now want to exit the EU. In this respect, instead of the decision of the UK having an effect on other people, we think Brexit can be taken as a consequence of the tendency in many countries for dissatisfaction with economic disparity and immigration to boil over as a result of low growth in the global economy.”