'Brexit' forces Asia's central banks to consider new policy moves

A ballot box is opened for counting at the Titanic Exhibition Centre in Belfast, Northern Ireland, as counting gets underway in the referendum on the UK membership of the European Union. Photo:AP/PTI
Central banks in Asia are considering fresh policy moves to shore up their economies after Britain’s vote to leave the European Union rattled markets in the region and sent the yen soaring against the dollar.

The yen touched a 31-month high against the dollar Friday as investors spooked by the U.K.’s decision sought safety in the currency, while the Nikkei Stock Average fell 8%--its biggest drop since March 2011. 

A weaker yen has been a key element of Abenomics, Prime Minister Shinzo Abe’s economic program, and reversing its gains in recent months is widely seen as one of Japan’s biggest priorities. Additional yen strength would likely weigh on inflation further by lowering import prices and squeezing exporters’ profits. 

Mr. Abe instructed the Finance Ministry and the Bank of Japan on Friday to work together to deal with the market turmoil and asked them to hold close consultations with G-7 partners.

Bank of Japan Gov. Haruhiko Kuroda said the central bank is prepared to take action, though he didn’t specify what form it might take or what the objective might be. 

In the aftermath of the “Brexit” vote, the yen could rise to 95 or even 90 against the dollar, hurting corporate profits and private consumption, said Takuji Okubo, chief economist at Japan Macro Advisors. “If that happens the sense that Abenomics has failed will be very widespread,” he added.

Some economists say the BOJ has little power to weaken the yen with monetary policy alone. Its quantitative easing is seen as overextended after three years of aggressive asset purchases. Its setting of a negative interest rate on some bank reserves in February has pushed borrowing costs lower, but this hasn’t stimulated borrowing and the policy remains widely unpopular. 

The question of direct market intervention by the Ministry of Finance, on the other hand, has been a source of tension this year between Japanese and U.S. policy makers. 

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance, said he expects the BOJ to push a key interest rate on some bank reserves further into negative territory from minus 0.1% now. “They will just have to unleash everything they have” even if it may not work, he said.

The BOJ’s next scheduled policy decision is on July 29, though some economists think it shouldn’t wait that long to take action. “If they can, they should convene an emergency policy meeting,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

In China, expectations are rising that the central bank will move to free up more money for lending. Market analysts this past week expected the People’s Bank of China to reduce the reserves Chinese commercial banks are required to keep with the central bank to boost a flagging Chinese economy. 

Doing so as early as this weekend, some analysts said, could also win the PBOC international praise for bolstering global markets. “China can exhibit its status as a global citizen and signal its willingness to lift market sentiment” hurt by Brexit, Australia & New Zealand Banking Group said in a note.

But some Chinese officials and analysts caution that the central bank may choose to reserve its firepower, saying a reduction in banks’ reserve requirements now could add pressure on a weakening yuan when the PBOC is trying to stabilize it. “Right now, the top priority is to keep the currency relatively stable,” an official said.

Yuan trading was volatile on Friday. The currency slid to a five-year low of 6.6148 in early trading. It later stabilized amid signs that state-owned Chinese banks, which often serve as a proxy for China’s central bank, were selling dollars and buying yuan. It resumed its slide later, but then rebounded as traders said Chinese banks intervened again under the instruction of the central bank.

The British vote will likely challenge the resolve of China’s central bank’s to let market forces have a bigger influence over yuan trading, analysts said. “Today is a big test … for the PBOC on managing the movement of the yuan, said Natixis analyst Iris Pang.

In a statement posted on its website late Friday, the PBOC pledged to keep the yuan “basically stable at a reasonable equilibrium level” as it tries to let market forces play a bigger role in setting its value. 

Meanwhile, India’s central bank chief sought to reassure the nation after the benchmark S&P BSE Sensex fell as much as 4% and the rupee weakened 1.4% against the dollar to its lowest level in nearly four months, as investors reacted to the U.K. vote. 

Reserve Bank of India Governor Raghuram Rajan said the central bank was keeping an eye on the markets and was “fully ready to provide whatever liquidity is needed, both dollar liquidity as well as rupee liquidity.”

Elsewhere in the Asia-Pacific region, policy makers expected the fallout from the vote to be more limited. 

Indonesian Trade Minister Tom Lembong called the vote a “highly unfortunate development,” but said it wouldn’t affect his country’s efforts to negotiate a free-trade agreement with the EU. 

In Australia, John Edwards, a member of the Reserve Bank of Australia’s policy-setting board said Britain’s vote to leave the European Union wouldn’t have a lasting impact on global financial markets. Mr. Edwards, an economist whose term with the RBA ends next month said, the U.K. isn’t “a sufficiently large economy that a setback to growth there will have much influence elsewhere.”

—Henry Hoenig, Gabriele Parussini, Ben Otto and Rob Taylor contributed to this article.

(Source: The Wall Street Journal)

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