On June 24th, a shocking piece of news spread across the world. England's withdrawal from the EU chosen by referendum, the so called "Brexit Shock".
The trend became clear around noon Japan time. From just before 11, news of the Leave faction's dominance caused a drop in the Nikkei Stock Average, with a sudden from of over ¥500 upon announcement of their victory during lunchtime. In the end, the Nikkei Stock Average closed at ¥14,952, ¥1,286 lower than the previous day. After the Leave faction's victory was confirmed, of all the major markets only Japan was open, leading to a flood of sales from investors all over the world. Similarly, the US Dollar-yen exchange rate saw a ¥7 rise in one day, with the appreciation of the yen accelerating. Following this, it seems there is still a risk of the yen appreciating further.
Stock, real-estate, and other markets that make up the Japanese financial markets are greatly influenced by the exchange rate (Primarily the USD-JPY rate). Due to this, the USD-JPY rate is one important measure of investors Risk-on, risk-off (RoRo) attitudes. On the 6th of this month, Japanese 20-year government bonds gave a negative yield for the first time ever, clearly showing the current risk off attitude of investors. In the UK, successive cancelation of real-estate funds since the referendum have lead to a temporary halt in trading, and it seems this will continue for the time being.
Further, is appreciation of the yen really does accelerate, a decrease in foreign investment into Japan’s real-estate market is predicted. The yen has already appreciated by 20% since last summer, meaning foreign investors have essentially seen a 20% price increase. After the credit shock, the exchange rate was at ¥85 to the dollar, with some specialists pointing to the possibility of it reaching ¥60. However, this does not mean there is need to become too pessimistic. Exchange rate predictions aren't that accurate. For over 10 years, I have interviewed a large number of experts. While it is only my personal opinion, exchange rate predictions by economists, etc. can vary even when interviewed on the same topic. Some may say the yen will rise, others may say the opposite, and so on, meaning their predictions lack uniformity. The basis of their predictions depend on how they interpret the issue, which leads to big differences. While it is true there are currently many specialists pointing to a tendency for appreciation of the yen, these predictions come with a background of "further shocks may follow the Brexit shock" and "the rise in american interest rates has receded".
In other words, if this background changes so may the predictions. While there really is no way of knowing, the NY Dow Jones industrial average in the United States has calmed down to the point of reaching its pre-shock level.
For now, it is important to assess the situation without panicking. In this column we hope to keep an eye on the situation, and keep you updated.
Jul. 13, 2016