<![CDATA[Fear of no-deal Brexit leaves Japanese firms considering a UK exit]>

Ever since the referendum in 2016 that decided Britain should leave the European Union, senior Japanese officials have been uncharacteristically vocal in raising concerns about the country crashing out of the bloc without a deal.

A so-called no-deal Brexit would probably mean that Britain has to trade on World Trade Organisation terms, and UK-based firms, including Japanese ones, will have to pay new and expensive tariffs on imports from the EU and goods sold to the rest of the bloc. Carmakers would be especially hard hit.

Their jitters have only heightened since July 24 when former British foreign secretary Boris Johnson became prime minister. Within hours of Johnson's victory, Japanese Prime Minister Shinzo Abe yet again urged Britain not to leave the EU without a deal or to jeopardise the interests of Japanese firms that had invested heavily in the UK since the 1980s.

For weeks, Johnson had promised to leave the EU by October 31 "come what may" " including without a deal.

Fraser Cameron, director of the EU-Asia Centre, a Brussels-based think tank, said: "The Japanese have been remarkably outspoken in criticising Brexit [and about Britain] leaving the EU's single market and customs union, and are vehemently against a no-deal Brexit."

In a BBC interview in June, Japan's Foreign Minister Taro Kono noted there were currently around 1,000 Japanese companies operating in Britain, making up about one-sixth of all Japanese firms with operations in the EU.

One result of a no-deal Brexit "could be that there is going to be less investment" from Japan in Britain, Kono said.

Since the 1980s, Japan has viewed Britain as the "gateway to Europe" and, by the end of last year, Japanese investment in the country totalled US$163 billion " accounting for almost one-third of all Japanese investment in Europe, according to data from the Japan External Trade Organisation (JETRO).

Takumi Fujino, director general of JETRO London, said the impact of a no-deal Brexit would vary, depending on a company's business activities and the territories covered.

In the case of Japanese carmakers Nissan, Toyota and Honda, which collectively produce about half the cars manufactured in the UK, most of the finished products are sold elsewhere in Europe. If Britain leaves the bloc without a deal, manufacturers would see new customs checks and tariffs applied when sourcing parts from countries within the EU, while their exports to the continent would incur new duties of up to 10 per cent and closer inspections at the border, delaying shipments.

Britain's car-manufacturing industry will be hit hard if jitters over Brexit prompt Japanese companies to pull out from the country. Photo: AFP alt=Britain's car-manufacturing industry will be hit hard if jitters over Brexit prompt Japanese companies to pull out from the country. Photo: AFP

Pernille Rudlin, managing director of Rudlin Consulting, a UK-based consultancy and an expert on Japanese-European relations, said Japanese businesses wanted "smooth, frictionless trade with Europe [and] easy access to European employees".

"The biggest headache for Japanese companies in Europe for many years now has been hiring and retaining good-quality people " and regulatory alignment. So a no-deal situation is absolutely the worst case for them.

"They can't quite believe that a country which they saw as a model of political and economic stability has been consumed by populism to the extent that it will willingly damage itself," she added.

In September 2016, just three months after the Brexit referendum, the Japanese government published a memo that presciently predicted a situation businesses have now found themselves in. "What Japanese businesses in Europe most wish to avoid," it said, "is the situation in which they are unable to discern clearly the way the Brexit negotiations are going, only grasping the whole picture at the last minute."

Indeed, despite the risks of a no-deal Brexit having risen considerably since last year, some 73 per cent of Japanese firms based in the UK said that "no plan has been made" or they had "not decided" on a contingency in case Britain leaves the EU without a deal, according to a survey conducted in December by JETRO.

All of this comes at a problematic time for Japan, which is experiencing the economic costs of a US-China trade war, sluggish demand from China and a slowdown of global growth. Tokyo in late July forecast economic growth of just 0.9 per cent in the 12 months to March 2020, down from the 1.3 per cent it had predicted in January. Meanwhile, export growth was also downgraded to just 0.5 per cent, from the 3 per cent increase that had been forecast in January.

It is not only Japanese carmakers in the UK that are worried about a no-deal Brexit. London has been the financial centre of Europe for several decades, but leaving the EU without a deal could mean that banks and investment firms lose their "passporting" rights, which allow financial services companies regulated in one EU country to do business in another. As a result, Norinchukin Bank, one of Japan's largest, announced in January that it would set up a wholly owned subsidiary in Amsterdam, the Dutch capital. By doing so, it will take great swathes of capital it has invested in the UK across to the Netherlands. It said the decision was "in response to the planned withdrawal of the United Kingdom from the European Union".

A representative of Asahi Beer UK, which had a turnover of US$400 million last year, said that the company was "unable to comment until we know for certain what Brexit will mean for the UK". Such a stance is reminiscent of the Japanese government's warning from three years ago.

Speaking anonymously, a number of trade representatives said that they had been told by Tokyo not to comment on Brexit affairs " especially since Johnson became prime minister last week " and instead let the Japanese government comment on the matter. This could not be independently confirmed.

Aioi Nissay Dowa Europe, a major insurance group active across Europe that has its own dedicated "Brexit Team", also refused to answer questions " referring reporters to its website instead, where a 15-point "frequently asked questions" section states that in preparation for a no-deal Brexit, the company in March redomiciled its European insurance interests to Luxembourg because if Britain left without a deal then "UK insurance companies would not be permitted to offer insurance products to EEA customers". This is a reference to the European Economic Area that allows non-EU countries to access the bloc's single market.

The JETRO survey from December did reveal more worries of Japanese firms. About 71 per cent of respondents said their greatest concern was an "economic slump in the UK". The British pound fell this week to its lowest level in 28 months because of growing fears of a no-deal Brexit.

Happier times ... Japanese Prime Minister Shinzo Abe with his then British counterpart Theresa May in 2017. Photo: AFP alt=Happier times ... Japanese Prime Minister Shinzo Abe with his then British counterpart Theresa May in 2017. Photo: AFP

For the one-quarter of respondents making contingency plans for a no-deal Brexit, the most common activity was stockpiling goods, mostly from EU clients, so as to exploit the current lack of tariffs.

The uncertainty has already taken its toll. In February, Honda announced it would close its factory in the west of England in 2021, but its executives said the decision wasn't about Brexit. Nissan's decision not to manufacture a new range of SUVs at a plant in Sunderland, in northern England, was also put down to factors other than Brexit.

Sony and Panasonic, two Japanese tech giants, have announced they will be moving some operations to the Netherlands. The JETRO survey found that of the companies that had decided to relocate, or had relocated, part of their operations from the UK to elsewhere in Europe, some 61 per cent had also decided to move their regional headquarters as part of the move.

Following Brexit, the UK will no longer be the "trusted base" that Japanese companies are looking for, said Maaike Okano-Heijmans, a senior research fellow and an EU-Asia expert at the Netherlands Institute of International Relations. From informal chats with a number of Japanese business representatives and experts on Japanese trade, she added, "more than a few have already concluded that they should work more from the continent" than Britain from now on.

London is eager to push ahead with talks for a UK-Japan free-trade deal so that it can be signed as soon as Britain leaves the EU. A letter sent in January by the former UK foreign secretary Jeremy Hunt and former international trade secretary Liam Fox to their counterparts in Japan is thought to have annoyed officials in Tokyo as they thought it implied that they were dragging their feet. Yet for Japan, tariffs on bilateral trade " worth less than 2 per cent of each nation's overall trade accounts last year " are only one part of the problem.

Just as serious for Japanese businesses invested in Europe are new tariffs on UK-Europe trade that would be imposed in the event of a no-deal Brexit.

But investment trends also indicate that Japanese firms no longer see Britain as the only "gateway to Europe". Japanese foreign direct investment in the UK peaked in 2016 at US$51 billion, up from US$13 billion the previous year. But it slipped to US$22.3 billion in 2017 and US$21.4 billion last year. And if the US$1.7 billion invested in the first three months of this year is anything to go by, it could slump to just US$6.8 billion for the whole of 2019, the lowest amount in five years. Yet Japanese investment elsewhere in Europe is growing. Germany saw almost as much inward investment from Japan in the first three months of this year as Britain did, whereas for the whole of last year it was just a quarter of Japan-to-UK investment.

Boris Johnson, Britain's new prime minister, pictured with Japan's Foreign Minister Taro Kono in 2017. Photo: AFP alt=Boris Johnson, Britain's new prime minister, pictured with Japan's Foreign Minister Taro Kono in 2017. Photo: AFP

Countries within the European bloc are also helped by the fact that the EU-Japan Economic Partnership Agreement " which is likely to boost Japanese investment " came into force on February 1.

As a whole, EU imports from Japan dropped to just 3.7 per cent of total imports in 2017, from about 12 per cent in 1990, according to European Commission data.

Still, it is not all doom and gloom.

The JETRO survey found more respondents predicting business "expansion" over the next two years, compared to a survey done in 2017. Rudlin said Japanese businesspeople enjoyed living in Britain and "are trying to cling on, probably having lots of heated discussions with Japan HQ who are less sympathetic, more objective".

She had heard rumours of Japanese companies having evacuation plans in place for their expats in case a no-deal Brexit leads to food shortages and riots.

This article originally appeared on the South China Morning Post (SCMP).

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