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Brexit – The Japanese perspective

22 March 2017

Jurisdictions: Japan

By Jacky Scanlan-Dyas

"There are numerous Japanese businesses operating in Europe, which have created 440,000 jobs. A considerable number of these firms are concentrated in the UK. Nearly half of Japanese direct investment intended for the EU in 2015 flowed to the UK, and the UK was one of the major destinations for Japan’s investment stock within the EU as of the end of last year. […] In light of the fact that a number of Japanese businesses, invited by the Government in some cases, have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe, we strongly request that the UK will consider this fact seriously and respond in a responsible manner to minimise any harmful effects on these businesses."

Although long, this quote sums up perfectly what you need to know about the Japanese perspective on Brexit. 

The quote is taken from "Japan’s Message to the United Kingdom and the European Union" a 15-page government document issued on the eve of the G20 summit in China in September 2016. Within the 15 pages, the Japanese Government laid out in detail every potential Brexit-related economic impairment as well as pages of requests on how the UK's relation to the EU should be structured. In a nutshell: Keep calm and carry on with no changes at all. But if "no change" is not on the table, then top of the “most unwanted” list were trade restrictions followed closely by restrictions on hiring qualified personnel, differences in regulations and standards, and the loss of "Passporting" rights for financial institutions.

It is uncommon to see such a letter. Most countries, especially non-European countries, are reluctant to be seen to intervene in the Brexit discussion. China, for example, pre the Brexit vote commented that it was an internal matter and that China only wanted a strong and stable Europe.

Explanations for the Japanese government's reaction might be ascribed to either their business culture, in which stability and reliability are core values, or to plain economic reasons. Japanese companies use the UK as the door to the Single Market. Many companies not only operate their European headquarters in London but also have invested in manufacturing capabilities that also export to the EU. The prospect of a 10% tariff on, for example, car exports pursuant to WTO trade terms understandably seem quite grim.

To highlight the importance of free trade, according to EurActiv the EU and Japan have committed to completing talks on a free trade agreement by the end of 2017. At a March 2017 press conference with Japanese Prime Minister Shinzo Abe, Jean-Claude Juncker said he was "very confident […] of a swift agreement this year." Mr Juncker said, "our negotiations with Japan are now in a decisive and hopefully final stage […]," and made clear that the free trade agreement was a priority for the EU. Mr Juncker noted, however, that “the few remaining issues are the most difficult to solve.”Mr Abe said, “Japan and Europe must work […] and raise high the flag of free trade […] In the midst of troubling protectionist trends, I find it important for Japan and the EU to cooperate with the United States as well, to give the world a model of free trade.”
We wait with bated breath to see whether this cooperation and model of free trade extends to the U.K. post-Brexit.

The government's letter in September isn’t the only time Japanese companies have voiced concern about Brexit. Several companies gave public statements expressing their opinions. Car manufacturers stated that plants would come under constant review, Japanese banks in December 2016 even threated to move some functions from London within six months unless they get clarity on the UK's future.

The following are typical of the quotes we are seeing. These are taken from the results of our Hogan Lovells “Brexometer”, which was published in late March 2017. I would encourage you to take a look if you have not done so already.

“Brexit will directly hit our research processes in the UK and there is a likelihood that we will shut down our R&D operations. The end result of Brexit would somewhat limit our business growth.” Japanese Life Sciences Respondent.

“There are still two years before the final exit of the UK from the EU will happen. Within that time period, we expect extreme uncertainty and risks surrounding exit negotiations.” Japanese Financial Services Respondent.

The Japanese government didn't just issue warnings and requests but also tried to find solutions for their problem: Ireland might be part of Japanese's coping strategy. In January Fumio Kishida, Minister of Foreign Affairs met with his colleague Charlie Flanagan to announce a co-operation between the two countries. Ireland was chosen because it shares a border and has very close ties with the UK. The English language, no doubt, also played a role.

As it is always the case, there is another side to the coin.

Opportunities are seen in possible new trade deals with the UK which might go further than the current position. For the UK still being a Member State of the EU formal negotiations are off the table but Paul Madden, Britain's new ambassador to Japan, told the press that there already have been "conversations". Because of the trade and the investment relationship between the two countries, Japan is seen as an "important priority" for new bilateral trade deals.

Closer ties between the two countries aren't limited to trade relations. The Japanese government is considering further co-operation in the military/security area.

However, it is worth commenting here that for the initial survey of our Brexometer, not one of the Japanese respondents saw Brexit as currently an opportunity for their business. So while these opportunities might well arise further on down the track, for now caution rules, as they say in Japan - “issun saki wa yami”, [it is dark one inch ahead of you].

But, to round off this blog post, I’d like to make use of a common U.K. proverb - “the proof of the pudding is in the eating”. And undoubtedly the best way to show that Japanese companies don't assess the future as grim as it might seem is a simple economic fact. In 2016 Japanese businesses bought 37 British companies spending $ 33.5bn. This sum constitutes no. 3 in the ranking. Only US ($ 69.3bn) and British ($ 39bn) companies spent more money on UK-targeted M&A. While most of money has to attributed to the acquisition of ARM by SoftBank, the total is still considerable.