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How Could the Brexit Vote Impact Japan?

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Japan’s financial markets reacted sharply

The Brexit vote has been a concern for Japan’s stocks and bonds. The Japanese yen rose after the Brexit vote as investors bought the yen. Japan’s currency works as a safe-haven asset. Whenever any macro event occurs, investors buy the unit. A stronger yen is detrimental to Japanese exports—it makes them expensive in the international market. The iShares MSCI Japan ETF (EWJ) fell after the vote, although it has recovered now. However, the WisdomTree Japan Hedged Equity Fund (DXJ) had fallen more than EWJ. It’s still down from its levels on June 23.

Following the vote on June 23, Japan’s finance minister, Taro Aso, stated that “Stability in foreign exchange and financial markets is important for Japanese economic growth, and it looks like the markets are skittish.”

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Impact on business and the economy

Several Japanese companies like Toyota (TM), Nissan Motor (NSANY), and Honda Motor (HMC) have their manufacturing plants in the United Kingdom. The plants serve the European market. Most of the cars built in these plants are sold to non-United Kingdom countries in Europe. If tariffs are imposed on companies functioning out of the United Kingdom and exporting to EU members. These companies will take a hit on their balance sheets. This could cause them to partially or fully exit the United Kingdom and set up their manufacturing units somewhere else. The loss of the single-market system in the EU would hurt Japanese companies operating in the United Kingdom.

On the economic front, like other central banks, the Bank of Japan will need to be ready to provide additional stimulus, if required, to support the already ailing economy. In a recent development, the victory of Japan’s prime minister, Shinzo Abe, in the upper house election on July 10 raised hopes that additional fiscal stimulus measures might come through.

Next, we’ll look at how the Brexit vote will impact emerging markets starting with China.

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