Bank of Japan issues Brexit warning

Asia (including Japan)

Asia including Japan briefing

During September, Japan’s Foreign Ministry warned the UK that Brexit could result in Japanese firms moving their European headquarters out of the UK. The Bank of Japan maintained its negative interest rate, instigated a new policy of yield control, and reiterated its relatively aggressive policy stance.

  • Looking ahead, further cuts in Japan’s key interest rate remain possible
  • Philip Lowe took over as Governor of the Reserve Bank of Australia
  • South Korea grew at its fastest annualised growth since Q3 2014

The potential effects of the Brexit vote continued to reverberate around the world during September with the publication of a letter from Japan’s Foreign Ministry . The letter warned that the UK’s exit from the European Union (EU) could result in Japanese companies moving their UK-based European headquarters out of the UK and into Continental Europe, if EU laws cease to apply in the UK after Brexit.

The potential effects of the Brexit vote continued to reverberate around the world.

The Nikkei 225 Index fell by 2.6% during September, while the Topix Index fell by 0.5%. Medium-sized companies fared somewhat better in comparison, and the TSE Second Section Index rose by 1.1% over the month.

Elsewhere, the Bank of Japan (BoJ) modified its programme of economic stimulus measures during the month. Although BoJ policymakers opted to maintain its key interest rate at -0.1%, the central bank announced that it intended to keep yields on ten-year Japanese Government Bonds (JGBs) at around zero percent, instead of allowing them to fall into negative territory. The BoJ also reiterated its aim of getting inflation above its target rate of 2% and indicated that further interest-rate cuts were possible.

Credit ratings agency Fitch affirmed Australia’s “AAA” rating, citing the country’s “strong institutions, effective governance and high income”. Although external finances remain a “longstanding structural weakness”, they are alleviated by Australia’s strong financing flexibility. Fitch warned that Australia’s fiscal position has continued to deteriorate and highlighted the risks posed by political uncertainty.

Philip Lowe became Governor of the Reserve Bank of Australia (RBA) in September, replacing Glenn Stevens. During the month, he provided a relatively positive outlook for Australia’s economy, citing better-than-expected economic growth and an improving labour market. Although commodity-related sectors are experiencing tough times, other areas are performing well. Looking ahead, he believes that the “drag” created by the decline in mining investment is also set to come to an end. The ASX All Ordinaries Index edged down by 0.1% over September.

South Korea’s economy notched up its fastest annualised growth since the third quarter of 2014 during the second quarter of 2016. The economy expanded at an annualised rate of 3.3% during the period. Manufacturing grew by 2.2% while private consumption rose by 3.3%. Manufacturing production fell more heavily than expected during August, registering a month-on-month decline of 2.5%. On an annualised basis, it rose by 2.3%. The Kospi Index rose by 0.4% during September.