Britain’s vote to leave the European Union may have long-term economic repercussions. Ueno Yasunari, a leading Japanese economist, discusses the outlook for the world economy.
Ueno YasunariChief market economist of the Fixed Income Research Department of Mizuho Securities. Born in 1963. Graduated from the History Department of the Faculty of Humanities of Sophia University. Joined the Board of Audit of Japan in 1986. Joined Fuji Bank (currently Mizuho Bank) in 1988. After working as a foreign exchange dealer, served as market economist for such sections as foreign exchange, funding, and fixed income. Became chief market economist with the establishment of Mizuho Securities in 2000.
Absorbing the Initial Shock
INTERVIEWER What is your reaction to Britain’s vote to leave the European Union?
UENO YASUNARI Before the referendum, I thought the Remain side would certainly win. But circumstances appear to have conspired against it. Heavy rainfall in London reduced voter turnout in areas with large numbers of young people in favor of staying in the EU. Also, many potential voters may have decided to stay home as polls immediately beforehand suggested that Remain was clearly ahead following the fatal shooting of the Labour parliamentarian Jo Cox while she was campaigning on behalf of Remain.
INTERVIEWER The market showed a volatile reaction to the vote for Brexit.
UENO Naturally, investors sought to avoid risk immediately after the referendum. Now they have returned to the market and are monitoring the situation. This is an entirely reasonable course of action.
With respect to equities, the New York market, the global benchmark, has reached a new high for the year. Post-Brexit, investors set aside their UK concerns and bought shares on positive US employment statistics. Even before this, though, equities had recovered their level before the Brexit vote.
Financial markets are currently flooded with excess liquidity. Central banks are easing monetary policy aggressively, with no end in sight to this approach. The global economy is burdened with low growth, low inflation, and low interest rates. With no place to go, excess liquidity has kept the stock markets buoyant.
It is to be expected that the London real estate market will be shaken as a sector directly impacted by the vote. However, there is no reason at the present moment for believing that this will derail the global financial system. Having learned from the collapse of Lehman Brothers, central banks are carefully monitoring cash positions in each nation.
Future Uncertainties Temper Business Confidence
INTERVIEWER In the medium to long term, what is the outlook for the British and EU economies?
UENO There are two factors to consider for Britain. The first is the impact of the depreciation of the pound. While foreign demand accounts for a low share of the domestic economy, it will turn upward since it will be stimulated by exports. On the other hand, rising prices will cause personal consumption to stagnate. The second factor is the worsening of confidence. This is already being seen in the demand for consumption and construction and in capital spending. Taken as a whole, Brexit is beginning to have an adverse effect on the economy.
Britain will find it difficult to counter rising prices by easing monetary policy. There is good reason for doubting whether the Bank of England can lower interest rates and restart quantitative easing. I believe the monetary policies of the central bank will be limited to halfway measures, such as lowering interest rates by a small amount and waiting to see what effect this has on the economy.
The vote for Brexit counters the trend for the deepening of the European Union and will have an adverse economic effect on Europe as a whole for the time being. There is still much uncertainty about what the European economy will look like a few years forward.
What is certain, though, is that Brexit will have a harmful impact for the British and European economies. It would not be surprising for the EU to compromise to some degree with Britain in Brexit negotiations. As seen in the Greek crisis, Europe tends to seek a solution through compromise when it confronts a problem. I do not believe that Brexit will result in a hard landing.
INTERVIEWER What impact will Brexit have on Japan’s economy? Will Japanese companies with operations in Britain need to restructure their European strategies?
UENO Japan will be affected negatively through a stronger yen. With the appreciation of the yen, the Abenomics rally is unraveling further through falling share prices. Since the yen has appreciated significantly against European currencies, the yen will not weaken against the dollar even if US equities rebound.
Japanese companies are in a situation where they cannot decide what to do next year since what will change with Brexit is still unknown. While there are reports that some financial institutions are planning to expand their presence on the European continent by shifting talent from Britain, considerable courage will be required of management to change the course of investments in the middle of these uncertainties.
The least that companies can do is to halt direct investments in Britain. A wide array of responses are likely to follow. The basis of action will be waiting and seeing, along with the examination of future scenarios.