The U.K.’s vote to leave the European Union may lead to unexpected challenges for Asian economies, with Japan likely to bear the brunt of pressure, mainly because of a stronger yen, analysts say.
With growth in the world’s second-largest economy stabilizing and debt concerns mounting, Brexit may lead to more bumps along the way.
- UBS AG: The People’s Bank of China will likely cut its reserve requirement ratio to ease domestic liquidity as part of a coordinated global monetary easing. The yuan may depreciate further against the U.S. dollar, but the export industry faces possible woes as internal divisions in the EU curtails demand, and the value of shipments falls. “There is some potential for a gap to open up between the volume of exports to the EU and nominal US dollar exports if the Euro weakens against the US dollar,” it said.
- Australia and New Zealand Banking Group: China is likely to use conventional and unconventional monetary policy tools. It can also exhibit its status as a global citizen and signal its willingness to lift market sentiment due to Brexit. “This morning we have seen a significant increase in market volatility globally and we would not overlook any PBOC action this weekend,” it said.
Already facing subdued economic growth and inflation, the Bank of Japan was projected to ease monetary policy further in coming weeks.
- Morgan Stanley: Japan is a key victim of Brexit, with Tokyo’s Topix index expected to be more volatile than most in Asia. A stronger yen could be a persistent headache going forward, and the effect can be significant: for every move of one yen against the dollar, earnings forecasts for companies on the Topix can fall by 65 basis points.
- UBS: Delays to U.S. interest-rate increases because of global uncertainty may be an additional driver of the yen. But a 16 percent fall in local-currency terms for Topix, to 1,100 points, would leave valuations close to lows in the pre-Abenomics era, which presents a buying opportunity. “Much depends on any move in monetary policy from the BoJ or intervention from the MOF to stem the yen’s likely rise,” it said.
The Bank of Korea made a pre-emptive cut in interest rates earlier this month as it prepared for the possible negative effect of corporate restructuring on economic activities and sentiment. Finance Minister Yoo Il Ho said on Friday the government has sufficient policy measures to respond to financial market volatility.
- Scotiabank: Markets typically sell off at times of risk aversion, and the won was the worst-performing currency in Asia on Friday. The bottom for the won may be at 1,200 per dollar, but policy reaction should be muted, according to Scotiabank. “Out-of-schedule monetary easing not likely in Asia as rates in most of the region already very low,” it said.
The city-state is heavily dependent on global trade and authorities are struggling to get economic growth going after the economy expanded a little above zero in the first quarter.
- Nomura Holdings Inc: Demand for highly-rated Singapore bonds may surge, as the country is widely seen as a triple-A safe haven. Falling yields in developed-market securities should drive Singapore’s in the same direction. Also, “a weaker currency will help push front-end rates higher,” it said.
The economy remains on a solid footing despite weak commodity prices and the currency has recovered strongly this year after sliding in 2015. The central bank extended trading hours for the ringgit on Friday and said there was ample liquidity in domestic markets.
- Capital Economics Ltd.: Malaysia has a large amount of short-term external debt and, like Indonesia, also a relatively high level of foreign-currency debt. An extended period of market volatility could push the central bank into action to defend the ringgit. “Policy rate hikes would come onto the agenda,” it said.
Indonesia’s central bank surprised economists last week when it cut interest rates to help spur lending and stimulate economic growth.
- State Street Corp: An anticipated rise in bond yields may make them more attractive for yield-starved investors down the line. Indonesia still looks like an outperformer, with the central bank biased toward rate cuts to support economic growth and given benign inflation. “Bonds still look attractive but the currency might be different and you might see currency hedging,” it said.
- S&P Global Ratings: Southeast Asian firms, especially Indonesian ones, could find it more difficult to refinance and sell U.S. dollar bonds as their currencies fall. “The direct impact on the area’s companies is limited as most don’t have operations in the U.K.,” it said.