Japanese Yen Soars with Brexit Results
The JPY has proven its strength as a safe haven currency in times of turmoil. The British pound to yen exchange rate has fully illustrated how situations of uncertainty, such as the British referendum over the country’s EU membership, play into the forex market. The Brexit results are in—the U.K. is out of the EU and the pound’s value is tanking.
The pound to yen pair, that is JPY to GBP, has felt a tsunami-sized impact from the Brexit. The Nikkei index in Tokyo lost 7.92%, falling to 14,952.02 points. The Nikkei endured tremendous volatility. At first, the Nikkei rose almost one percent, as the first wave of Brexit polls indicated a higher probability for “Bremain” in the British referendum. By the time the Brexit results showed their true color, the Japanese stock exchange crashed. Still, the yen soared. The JPY fell below the 100 mark against the U.S. dollar and the pound to yen pair closed at 143 yen, which makes the pound 27% cheaper compared to the yen a year ago.
Yet, the pound lost almost 14% over the yen, the biggest single-day drop. The other Asian markets also felt a sharp drop, with Australia losing 3.3%.
The Chinese stock exchanges appear not to have felt the full impact of the Brexit results, though. For now, they seem to have contained the damage in the forex market.
Japan may have to intervene to slow the rise of the yen against the declining pound’s value. Japanese Finance Minister Taro Aso said that because investors consider the yen a safe haven currency during international financial storms, it tends to appreciate when investors experience reduced appetite for risk. (Source: “Japan signals readiness to intervene as Brexit boosts yen,” Reuters, June 24, 2016.)
A strong yen tends to depress the Japanese stock market and exports and helps to reduce inflation expectations. That means Japan could start selling yen in the forex markets not just to monitor the Japanese currency’s value, but it could also reignite the currency wars. The turmoil from the Brexit will strengthen the dollar against other Asian currencies, which is a rather undesirable effect for emerging markets that carry a lot of debt.
The Central Bank of Japan has already said it would provide additional liquidity to operators that might need it, including the use of existing swap agreements with other central banks from the Federal Reserve. (Source: Ibid.) No doubt, the Bank of Japan will continue to monitor the impact of the referendum on the global financial markets as the minister hinted, but the impact has not fully materialized yet.
The Japanese have always considered Britain a great place to invest. London is second only to New York in popularity for Japanese investors, who, until now, have seen London as a platform for the entire European market. Certainly, based on the Nikkei performance, no Japanese company expects something positive from the Brexit, while many fear variously negative consequences. (Source: “Global stock markets plummet as polls show UK voters favour leaving the European Union,” News.com.au, June 14, 2016.)
Given the perception of fragility, the Brexit, despite Tokyo’s efforts to control the rise of the yen and the drop in the value of the GBP to JPY, not to mention the yen’s rise against the euro or dollar, the yen will now be a safe haven currency more than ever.
Overall, the prospect of a split Europe makes the continent less attractive as a place to invest. The Brexit may have just activated a global economic slowdown.