SINGAPORE (June 28): The largest impact on Asia-Pacific economies will come through the massive confidence shock triggered by Brexit, which will spill over to the Asian real economy and cause output growth to slow, says Scotiabank.

“The United Kingdom’s vote to leave the European Union has triggered substantial financial market volatility and investor risk aversion,” says Pablo Bréard, Scotiabank’s head of international economics, in a Monday report.

“This has been demonstrated by a sizeable currency depreciation bias across regional emerging economies as well as an equity market sell-off,” Bréard adds.

Volatility has prompted monetary authorities such as the Reserve Bank of India and the Bank of Korea to intervene in order to limit currency weakness.

Meanwhile, many other regional central banks have issued statements highlighting that they are monitoring financial market developments closely and stand ready to provide additional liquidity to the banking system if needed, Scotiabank says.

But increased risk aversion has seen the Japanese yen buck the trend and strengthen against the US dollar and other regional currencies, driven by safe haven flows.

“The yen strength will likely make Japan’s deflation problem worse over the coming months while simultaneously adding to the challenges faced by struggling Japanese exporters,” says Bréard. “Accordingly, we expect the Bank of Japan to ease monetary policy in the near term, most likely in July.”

Scotiabank warns that weakened business sentiment and deep asset price declines could cause cutbacks in business spending and hiring, causing higher unemployment and weaker consumer spending.

“To counteract such a negative scenario and to support domestic demand, authorities across Asia-Pacific will likely unveil further fiscal stimulus,” Bréard says.