British Prime Minister Boris Johnson faces an uphill battle getting a deal through the British parliament by the October 31 deadline. Image: iStock

Brexit was supposed to happen by the end of March, but uncertainty prevails. The United Kingdom has been granted permission to delay its exit from the European Union until the end of October, months after the European elections in May. Also, Prime Minister Theresa May announced that she would step down after Brexit has been finalized but a “no-deal” scenario persists.

While Brexit has caused many sleepless nights, policy-makers across the Indo-Pacific region share the view that Brexit might be a “blessing in disguise” for improving strategic partnerships with the United Kingdom. Tokyo-based policy-makers, in particular, have echoed a resounding “yes” – called the “Tokyo Consensus” – as Japan-UK relations regarding military cooperation have not been this comprehensive since before World War I.

Both have engaged in defense equipment cooperation, joint research and development missions, and the UK has even deployed its Typhoon fighter aircraft to Misawa Air Base in Japan.

But while Japanese policymakers continue to focus on the strategic and political partnership with the UK, Japanese companies in the UK continue to suffer.

In the Harvard Business Review, Paul Maidment wrote that “…the prolonged uncertainty has been agonizing for [Japanese] businesses affected by the political process.” Many Japanese companies are relocating their European headquarters to EU countries to continue business as usual within the single European market and to maintain their financial passport rights. Meanwhile, big car manufacturers such as Honda, Toyota, and Nissan have been closing manufacturing plants or halted their production lines of certain cars – potentially threatening the employment of more than 10,000 British workers.

Accordingly, earlier this March, Koji Tsuruoka, the Japanese ambassador to the UK, spoke on behalf of Japanese companies, warning Britain of the dangers of not negotiating a “promising post-Brexit deal.”

He said, “These are all global companies and therefore they have other possibilities other than staying… they may relocate. Or they may combine or consolidate. But you can’t make those decisions until you know what’s going to happen next. This is very important.”

He also said that most Japanese companies want to expand their businesses in the UK and elsewhere but without knowing what is going to happen next regarding the UK-EU relationship, potential investments continue to be stalled. Some Japanese firms have continued to invest in their UK businesses, but overall, investment has stagnated since Brexit.

Japanese companies in the UK accumulated an annual investment of $158 billion, including 634 Japanese firms which report annual sales of $68 billion, employing 150,000 workers. Thus, Japan remains the second-largest foreign direct investor in the UK with more than 1,300 Japanese companies having shops across the country.

The warning by the Japanese ambassador has not been the first. In 2016, Japanese Prime Minister Shinzo Abe warned that the UK would become a “…less attractive destination for Japanese investment.” Earlier, in January 2019, he also warned the UK that “the world is watching” at a joint press conference with Prime Minister May. In a survey by the Japan External Trade Organization in 2017,  Japanese companies across Europe cited Brexit as their number one concern.

In a survey by the Japan External Trade Organization in 2017,  Japanese companies across Europe cited Brexit as their number one concern

In 2017, May visited Japan to convey the crucial economic importance of Japan for Britain. She held direct meetings with executives of large Japanese investors including Hitachi and Nissan. To assuage the concerns of the Japanese business community – and to the surprise of many – May announced a Free Trade Agreement (FTA) after Brexit that would be similar to the Japan-EU Economic Partnership Agreement.

At the time, she thought Japanese businesses would remain in the UK after Brexit and continue investing in the country, which she would be able to sell to UK citizens as an advantage of the divorce from the EU. However, Japan’s concerns persist as the UK cannot legally negotiate a free trade agreement while it is part of the EU.

If a “hard Brexit” happens, and the UK exits the EU’s single market, London will find it almost impossible to assure Japanese companies that the UK is a safe place to do business, and Japan’s UK business presence will likely continue to decrease.

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