European Council President Donald Tusk (L) and Japanese Prime Minister Shinzo Abe at the EU-Japan Summit in Brussels on July 06, 2017. Photo: AFP/Dursun Aydemir/Anadolu Agency
European Council President Donald Tusk (L) and Japanese Prime Minister Shinzo Abe at the EU-Japan Summit in Brussels on July 06, 2017. Photo: AFP/Dursun Aydemir/Anadolu Agency

Japan, an island nation off the Asian mainland, has – World War II notwithstanding – long enjoyed good relations with its European island counterpart, the United Kingdom.

But those happy relations have come under strain in recent years.

Under the previous British government of former Prime Minister David Cameron, the UK heavily promoted economic ties with China, to the point that former Chancellor of the Exchequer George Osborne even called Beijing Britain’s “best friend in the East.”

But shortly after the 2016 Brexit referendum, the UK shifted its focus to Japan. The reason? The UK has long been the key European destination for Japanese investors, but amid Brexit, uncertainty among those investors is rising. In 2016, when Japanese Prime Minister  Shinzo Abe visited the UK, he warned with unusual bluntness that leaving the EU would make the UK a “less attractive destination for Japanese investment.”

And that investment is important for the UK. Japan is the second largest foreign direct investor in the UK with more than 1,300 Japanese companies invested across the country. Compared to China’s foreign direct investment of £1.8 billion in 2015, Japan’s FDI accounts for £40.5 billion.

But now, with the UK leaving the EU, Japanese investments have stagnated, with Tokyo headquarters deeply concerned about the potential negative impacts of Brexit: a 2017 survey by the Japan External Trade Organization (JETRO) emphasized that for Japanese companies in Europe, Brexit is their number one concern. This is particularly so for the Japanese automotive, pharmaceutical and financial industries.

Japanese car manufactures Honda, Nissan and Toyota produce almost half of the 1.67 million cars produced in the UK. These vehicles are largely dispatched to European markets, so primary concerns for the Japanese firms include the reintroduction of border controls as well as tariff and non-tariff barriers.

The pharmaceutical industry has not been as outspoken about Brexit as the car industry, but the issues of restrictive tariffs, divergent rules and the relocation of the European Medicines Agency (EMA) from London to Amsterdam are major worries.

Naturally, London has been serving as Europe’s financial headquarters for Japanese companies. Now it remains unclear whether a post-Brexit UK will maintain its “passporting rights” which allow London-based firms to provide financial services across the EU.

Accordingly, several Japanese financial institutions have followed their American counterparts and relocated operations to continental Europe. This is a prudent, pre-emptive step, since it takes approximately 18 months to gain a financial license in the EU. The UK is now competing against EU countries which are keen to offer Japanese companies various incentives to relocate.

Even so, some Japanese companies have been reluctant to relocate their business to Europe, and a number – mainly IT and technology companies – have even decided to stay and invest more into the UK.  But overall, London is concerned about losing Japanese businesses.

In a move which symbolizes the critical economic importance of Japan for the UK, British Prime Minister Theresa May visited Japan in August 2017. During her three-day stay, May held direct meetings with executives of large Japanese investors including Hitachi and Nissan, which are concerned about Brexit’s negative impact on their business.

To smooth the concerns of the Japanese business community – and to the surprise of some – May announced a Japan-UK Free Trade Agreement (FTA) after Brexit. According to May, an FTA would help sustain Japanese businesses in the UK, invite further Japanese investment, and “appeal to British citizens as a benefit of Brexit.”

Yet, despite this “Global Britain” rhetoric, amid the shambolic state of Brexit politics in the Conservative Party, Tokyo still fears that the UK cannot maintain active engagement in Europe during and after the Brexit negotiations. And whether a London besieged by Brexit woes will remain actively engaged in Asia is a further worry for Tokyo, which is seeking friends and allies beyond its home region.

As long as the UK remains in the EU, Britain cannot legally negotiate an FTA, which is why Tokyo is so focused on post-Brexit Britain – the outcome expected in May 2019. If a “hard Brexit” transpires, and the UK is shut out of the EU’s single market, London will have a difficult, if not impossible, task ensuring that Japanese business’ interests in Europe are protected.

Given this, it is unsurprising that Japan has been looking away from London and focusing its energies instead on the EU-Japan Economic Partnership Agreement, which is designed to reduce the impact of divergent rules, restrictive tariffs and border controls for Japanese businesses in the EU.