Japanese Prime Minister Shinzo Abe's limping "Abenomics" revival programme suffered a fresh blow on Friday when Britain's vote to leave the European Union sent the yen soaring and threatened to make companies and consumers even more cautious.
Brexit' shock more bad news for Prime Minister's stumbling 'Abenomics'
The 'Vote Leave' campaign claimed unexpected victory over its 'Britain Stronger in Europe' rival, after 52 percent of Britons voted to support their plan to leave the 28-nation club.
Abe took office in December 2012 pledging to end decades of deflation in Japan and generate growth in an economy plagued by a shrinking, fast-ageing population with a mix of hyper-easy monetary policy, fiscal spending and reforms.
But the formula has largely failed. The central bank's aggressive money-printing has failed to accelerate inflation, and anaemic economic growth has discouraged firms from raising wages and households from spending.
"In terms of Abenomics, it was already dead in the water. This will certainly sink it a bit further," said Jeffrey Kingston, director of Asia studies at Temple University's Japan campus.
The yen, seen as a safe-haven currency, soared briefly above 100 to the dollar, prompting Finance Minister Taro Aso to signal a readiness to intervene to stem excessive strength.
Japan's policymakers worry the unwelcome rise in the Japanese currency will hurt exports and drive the economy back toward recession.
Prime Minister Shinzo Abe told reporters after meeting of relevant cabinet ministers that Britain's decision to leave the EU would have real effects on Japan's economy.
The Nikkei share average ended down 7.9 percent at 14,952.02 points, and has lost 21 percent since the start of the year.
"In Japan, while we can expect to see a temporary surge in the value of the yen, the U.K.'s decision could also bring a halt to the economic recovery that had been underway," Fujio Mitarai, chairman of camera and printer maker Canon Inc said in a statement.
"We look to the Japanese government to implement strong monetary measures."
Bank of Japan Governor Haruhiko Kuroda said the BOJ stands ready to provide ample liquidity to financial markets.
Market players fear policy makers have few options left to stem the rise in the yen or to rev-up the faltering economy. The yen had already risen around 15 percent against the dollar this year, threatening corporate profits.
Short term, Japan can intervene to try to soften the currency's gains.
"If the yen strengthens too far below 100, the Finance Ministry is likely to look for the possibility of currency intervention in close connection with the U.S. Treasury," said JP Morgan economist Masaaki Kanno.
The Bank of Japan can also expand its already hyper-easy monetary policy, if not at an emergency meeting, then at a scheduled policy board meeting on July 28-29, Kanno said.
"The BOJ will try to convince markets that there is still something in its toolbox. It could increase QE (quantitative easing) as well as cut negative rates," he said.
Doubts over how Britain will interact with the EU leave Japanese companies with U.K. headquarters and production facilities wondering how to proceed.
"What companies have to do is redraw their investment strategies ... with a negative effect overall on the Japanese economy and on globalisation, which is the trademark policy of Abenomics," said Martin Schulz, economist at Fujitsu Research Institute.
Jesper Koll, CEO at WisdomTree Japan, said, however, corporate profits from Europe, including Britain, account for just 6 percent of all Japanese corporate profits. The bigger impact, he said, was uncertainty for Japanese banks and insurers, which rely on London markets for 25-35 percent of their funding.
"The impact of Brexit on Japan's commercial and industrial outlook is relatively marginal," Koll said in an emailed report.
Economists estimated that "Brexit" fallout could cut 0.1-0.3 percentage points off Japan's gross domestic product, compared with a potential growth rate of 0.2-0.3 percent.
"Brexit" shock could further dampen corporate and consumer sentiment and spending, already weak spots in the Abenomics mix.
"'Risk-off' is not just a market issue, but companies looking at taking risk on the investment side - the result may be more savings," JP Morgan's Kanno said.
Abe's government has already put off until October 2019 a planned sales tax rise to avoid a hit to consumption. It is also preparing a fiscal package for later this year, though how much it could top up that package is unclear.
The "Brexit" blow comes as Abe campaigns for a July 10 upper house election that he is casting as a referendum on the sales tax rise delay and on "Abenomics" generally.
Despite already growing doubts about the success of the formula, media surveys on Friday forecast Abe's ruling bloc was headed for a hefty win. The hit from "Brexit" was unlikely to change those forecasts, several political analysts said, but still, a surprise could not be ruled out.
"When something big like this happens in the middle of the campaign - well, every so often things have happened and really changed the entire course of the election," said political analyst and author Atsuo Ito. "There is this possibility."
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