While the Brexit vote is having major impact on global investor sentiment, the direct impact on Japan is minimal. Japan’s annual exports to the UK only account for about ¥1.2trn, roughly 0.25% of Japan’s GDP.
However, the indirect consequences could be huge. Japan is highly exposed to what is already fragile global growth, which could suffer a further deterioration should we witness continued Brexit uncertainty. The uncertainty surrounds when and how the UK leaves the EU, which depends on the opinions and decisions of politicians. The outcomes are therefore anything but certain.
This economic uncertainty will weigh on Japan in several ways, particularly as the Japanese yen acts as a ‘safe haven’ currency. Global economic uncertainty typically leads to a stronger currency, making Japanese exports less competitive.
Business investment is also likely to decline in the UK and Europe, reducing global economic growth and impacting corporate earnings. In addition, weakness in the UK and European banking systems may have knock-on effects globally. Should this lead to lead to weakness in global consumer confidence, Japanese exporters will not be immune.
It is not difficult to assume the global economy will witness slower growth over the next couple of years than it would have had the UK voted to remain in Europe. Lower growth and a stronger currency will weigh on Japanese corporate earnings.
Past performance is not a guide to future performance. The value of investments can fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
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