In the wake of Britain’s historic vote last week to leave the European Union, Prime Minister Shinzo Abe on Monday instructed the Finance Ministry and the Bank of Japan to ensure the stability of financial markets and take steps if necessary.
Abe also instructed his team to keep in close contact with other Group of Seven economies and respond quickly and flexibly to the situation.
After seeing the biggest plunge in 16 years Friday, Tokyo stocks rebounded to 15,309.21, up 357.19 points, at Monday’s close, while the yen was moving around 102 against the dollar at 5 p.m. in Tokyo, after briefly surging to 99 on Friday as investors hoarded the safe-haven currency after the Brexit vote.
While Abe ordered the BOJ to ensure ample liquidity in markets, his government is ready to provide the economy fiscal support, with an eye on expanding planned stimulus steps to total more than ¥10 trillion, sources said.
Abe’s instructions came at an emergency meeting between the government and the BOJ as some analysts raised the possibility of the BOJ holding an unscheduled policy review ahead of the regular meeting later in July to offer additional stimulus.
“Risks and uncertainty remain in financial markets,” Abe said. “We need to continue to work toward market stability,” he added, signaling Tokyo’s readiness to conduct yen-selling intervention in the market if it deems yen rises as excessive.
The Nikkei business daily reported Saturday that intervention may be conducted if yen demand jumps abruptly and there is enough pressure on the economy and inflation.
It cited an unnamed Finance Ministry official as saying action is possible even without U.S. approval in a “fight” to protect “national interests.”
But analysts say it will be difficult for Tokyo to intervene in currency markets to stem the yen’s strength given the risks of it being labeled a currency manipulator. A surging yen adds to headaches for Japanese policymakers worried about the effect a strong yen could have on exports.
Abe summoned Finance Minister Taro Aso and Bank of Japan Deputy Gov. Hiroshi Nakaso to discuss how to deal with market turbulence caused by Brexit.
“I was instructed by the prime minister to take various, aggressive responses to ensure stability in financial and currency markets,” Aso told reporters after the meeting.
Nakaso said the BOJ remains in close contact with other central banks to ensure global financial markets have ample liquidity.
The deputy governor, who spoke to reporters after the meeting, declined to comment on whether the BOJ will hold an emergency rate review to expand monetary stimulus.
Some analysts say the central bank could hold an emergency meeting to expand stimulus further if the BOJ tankan business survey on Friday confirms a worsening of the domestic economy and prices.
“There’s a 30 percent chance of BOJ holding an extra policy meeting,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
“We have expected the BOJ to ease again in July. And Brexit further raised the possibility of BOJ action as it adds to risks to Japan’s economic outlook,” she said.
In a separate meeting Monday, senior officials of the industry ministry and major companies operating in Britain gathered to discuss the possible impacts on their businesses and other concerns.
According to credit research agency Teikoku Databank, there are 1,380 Japanese companies operating in Britain, with the manufacturing industry accounting for about 40 percent. A number of Japanese banks also engage in investment business in London, a key global financial center.
Some officials fear that Britain’s exit from the EU could result in Japanese companies having to pay additional tariffs to sell the products they make in Britain to EU members.
Business analysts have also said Japan and the European Union could face difficulty in reaching an agreement in their ongoing free trade negotiations by the end of the year, which they have set as a target.
In a related move, Foreign Minister Fumio Kishida requested the British government support Japanese companies operating there.
In a meeting with British Ambassador Tim Hitchens, Kishida asked London to ensure that Japanese firms can continue business.
The ambassador replied Britain acknowledges the need to cooperate with its major business partners including Japan and the United States and that he will organize a meeting with Japanesecompanies operating in Britain to explain the situation.
While the shock waves from the British vote could have an enormous economic impact in Japan and elsewhere, they are apparently lending support to Abe’s campaigning for the July 10 Upper House election.
Abe is warning voters against casting their ballots for the opposition at a time when world financial markets are reeling from the Brexit shock.
His ruling bloc already looks set for a hefty win in the upcoming poll but experts say the uncertainty spawned by Brexit is likely to persuade Japan’s cautious voters to give his coalition even greater backing.
The shift could give Abe’s Liberal Democratic Party and like-minded political parties a better shot of obtaining a two-thirds majority in the upper chamber needed to begin the process of revising the nation’s pacifist Constitution.
The main opposition Democratic Party argues that the rise in the yen and steep fall in Tokyo share prices signal the end of Abenomics, which after three years has failed to halt Japan’s decades of deflation or generate sustainable growth in an economy plagued by a shrinking, fast-aging population.
“It must be said that the Abenomics party is over,” Democratic Party leader Katsuya Okada said after the Brexit vote.
Analysts said, though, that the opposition argument is unlikely to gain much traction as long as market volatility persists. Many voters still remember the Democrats’ 2009-2012 rule was marred by infighting and policy missteps.
“If anything, Brexit is good for Abe,” said Gerry Curtis, professor emeritus at New York’s Columbia University. “In times of turmoil, the Japanese voter opts for stability.”