Market Insight
June 10, 2016
Brexit is not someone else’s problem. Exchange rate to
hit 100 yen
Hajime Takata, Chief Economist
Today’s focus is on the ‘ABC risks’ that are contributing to global instability. A refers to America, with the
Trump phenomenon and the outlook for interest rate hikes. B refers to Britain and the Brexit, focusing on the
prospective outcome of the June 23 referendum, which will ask “Should the United Kingdom remain a member
of the European Union or leave the European Union?”. C refers to the instability in China.
The theme of this report is the Brexit, but the referendum’s outcome is hard to predict. The following chart
illustrates the movement in public opinion polls from a UK polling company. The latest poll indicates the result
to be neck and neck with the support ratings for ‘remain’ at 43% and ‘leave’ at 42%. Mizuho Research Institute
has released a special report on the Brexit1. Many people in Japan think the Brexit would have a major impact
on the UK, but there does not appear to be a sense of this being a problem for Japan. There is a strong feeling
that the impact would be small within the aforementioned ‘ABC risks’. A decision to ‘leave’ would exacerbate
the uncertain economic outlook for the UK and Eurozone, which could lead to considerable financial market
instability. As a result, we anticipate the yen could strengthen by about 5 yen, i.e., approach 100 yen against the
[ Chart 1: Opinion polls concerning Britain leaving the EU ]
(%)
Remain
60
Leave
Undecided
50
40
30
20
10
0
01
April
06
11
16
21
26
01
May
06
11
16
21
26
31
05
June
(Month/day)
Note: Average in the case of multiple polls on the same day
Source: Made by Mizuho Research Institute Ltd. (MHRI) based upon NatCen Social Research, What UK Thinks - EU
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Kenichiro Yoshida, “Eikoku no EU ridatsu to sono eikyo” (Brexit and its impact), MHRI (June 9, 2016) (in
Japanese only).
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Market Insight
June 10，2016
dollar, based on current market levels. The concern for Japan would be that a strong yen could lead to lower
stock prices, deterioration in corporate earnings and exacerbate deflationary pressures. Moreover, since this
would go against the fundamentals, we would also expect talk of foreign currency intervention.
The following chart illustrates an investor risk capacity index for the global market, made by MHRI2. This
indicates the substantial decline in risk capacity that has occurred when there have been past risk events
concerning Europe.
[ Chart 2: Risk capacity index for the global market ]
3.0
(M-o-m change)
High risk
capacity
2.0
1.0
0.0
-1.0
-2.0
-3.0
① Immediately
after Lehman
Shock (Oct-08)
-4.0
-5.0
-6.0
③ Concerns about
soundness of
European Banks
(Jan-16)
② Deterioration in
European Debt Crisis
(Aug-11)
Low risk
capacity
(CY)
Note: Estimating investor risk capacity from 13 financial indices
Source: Made by MHRI based upon Datastream and Bloomberg
The following chart summarizes the level of likely impact if market fluctuations were to reoccur at levels
similar to those associated with the three risk events for Europe highlighted above: (1) Lehman shock (2008),
(2) European debt crisis (2011), and (3) concerns about the soundness of European banks (2016). The biggest
issue for Japan is that once an event occurs, the yen would be seen as a safe haven and could appreciate against
the dollar. If the risk capacity declines as it did in the aforementioned events (1), (2) and (3), we estimate the
yen could appreciate by 2 to 6 yen against the dollar and Nikkei Stock Average could fall 1,000 to 3,000 yen in
[ Chart 3: Impact on the USD/JPY and Nikkei Stock Average in the case of the Brexit ]
Past events
Estimate
Difference in risk
(Change
in the month)
capacity index
between May
actual and when USD/JPY
Nikkei Stock
event occurred (Units: yen) Average (Units: yen)
01-Oct-08
① Immediately after the
Lehman Shock
- 5.4
- 5.9
-3,276
01-Aug-11
② Deterioration in European
Debt Crisis
- 3.9
- 4.3
-2,381
01-Jan-16
③ Heightened concerns about
soundness of European Banks
- 1.6
- 1.7
-940
Note: Calculated by building a 4 variable VAR model from the USD/JPY, Nikkei average, US-Japan 10Y interest rate differential, and
risk capacity index, and using the impulse sensitivity coefficient. The calculated values are based on current levels (USD/JPY:
110 yen = $1; Nikkei average: 16,000 yen). Calculation period from January 2008 to May 2016.
Source: Made by MHRI based upon Datastream
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Atsushi Matsumoto, “Chugokuhatsu no risuku-ofu ga shuyokoku keizai ni ataeru eikyo wo do miruka”(Impact
of China triggered risk-off on major economies), MHRI (September 1, 2015) (in Japanese only).
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Market Insight
June 10，2016
a single month due to the initial shock. If we assume the yen has already appreciated to mid-100 yen levels
against the dollar, the yen could reach 100 yen at the time of such an event. That is why Japan cannot ignore the
Brexit as being someone else’s problem. Market moves contrary to Japan’s inherent fundamentals would
prompt discussion about foreign currency intervention and additional BOJ monetary easing to avoid such
moves.
This publication is compiled solely for the purpose of providing readers with information and is in no
way meant to encourage readers to buy or sell financial instruments. Although this publication is
compiled on the basis of sources which we believe to be reliable and correct, the Mizuho Research
Institute does not warrant its accuracy and certainty. Readers are requested to exercise their own
judgment in the use of this publication. Please also note that the contents of this publication may be
subject to change without prior notice.
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