British people woke up on 24 June to a new reality: the majority of British voters had submitted their ballot in support of politicians triggering negotiations for the nation to leave the European Union (EU). If the political chaos that has followed the nonbinding referendum is anything to go by, now comes the difficult part.
Trade ties, funding, fishing rights, immigration laws and environmental commitments are among the issues that need to be negotiated if the UK is to leave the EU. There is little reason to believe that talks on a new deal for the UK will go any smoother than those between the EU and Greece after it voted in the leftist Syriza government on an anti-austerity platform in 2015.
Are things really so complicated for the UK? For the next couple of years at least, the answer is probably yes.
“The short-term consequences depend on whether investors have enough confidence to keep buying the pound”, Robin Harding, Japan bureau chief at the Financial Times, said at a Tokyo meeting on the consequences of the referendum. “The long-run question depends on the terms of exit, but severe long-term damage is plausible”.
That damage, according to the Economist Intelligence Unit, “will not be distributed evenly … either across economic sectors or across time”. The research and analysis division expects real gross domestic product to take a 6% hit by 2020, and for “significant doubts [to] emerge about government cohesion”.
In Japan, for now, all the questions are about the yen. The verdict may still be out on Prime Minister Shinzo Abe’s programme to create a stronger Japanese economy, but one of its achievements was weakening the yen to levels that brought record profits to firms. The period of ¥120 against the US dollar looks to be finished over the short term.
“In Japan, the chief concern is the uncertainty and the impact on markets and consumption levels hurting the economy”, Julia Coym, senior Northeast Asia analyst at the global risk consultancy Control Risks, told BCCJ ACUMEN. “That would exacerbate a lot of the shakiness of economic growth that we see already, and will not improve the rising yen issue that is putting pressure on Japanese exporters”.
Relations beyond the economy between the UK and Japan are unlikely to be hurt, said Jun Shirakata, executive secretary of the Japan–British Society. “It is difficult for me to find any negative signs on UK–Japan relations now or in the future”, he said, adding, “the UK will have to take responsibility for the result for both people at home and in other countries, though I suppose it will take a lot of time”.
Until the political chaos is resolved and Prime Minister Theresa May, presumably, triggers Article 50 of the Lisbon Treaty and begins negotiations with the EU on how the UK leaves the bloc, there are likely to be few major movements.
“Many Japanese companies will consider relocating their offices from London to other cities, but they are very slow to move, and will wait two years”, said Seki Obata, associate professor at Keio Business School, at a conference. “But there will be serious effects”.
Former British Chamber of Commerce in Japan (BCCJ) Executive Committee (Excom) member Yuuichiro Nakajima, managing director of Crimson Phoenix—an M&A advisory with offices in Japan and the UK—is worried.
“Brexit will undoubtedly hurt the UK’s interests, as it will force many Japanese investors to seek alternative destinations for their capital within the EU or, at least, make them defer decisions to invest in the UK, he told BCCJ ACUMEN. “The two countries will, of course, work out a solution; but I fear that it will be a lengthy process and the damage for Britain in the meantime could be sustained and considerable”.
Not all are as certain that the effects will be grave. But what will happen to Japan–UK business relations remains uncertain. The stakes are high: around 140,000 people are employed by the 1,000 or so Japanese firms operating in the UK.
BCCJ Excom member Steve Crane of Business Link Japan K.K. said the UK “will be given time to get [its] house in order and, if we can do that, I am not anticipating too much negative damage on UK–Japan trade relations long term.
“I have always been impressed with how Japan deals with a crisis, and now the UK has an opportunity to demonstrate how we can respond to, and successfully handle, an unexpected crisis. If we can get it right, then longer term it may increase our positive reputation in Japanese eyes. Having a problem is one thing, dealing with it successfully is another”.
The British Embassy Tokyo has been working around the clock to keep key investors in the UK informed of the situation as best they can.
“We are still outwardly facing”, Esther Williams, head of trade at the British Embassy Tokyo, told BCCJ ACUMEN. “The UK is still a great place to do business. We are one of the strongest and most advanced economies in the world, and none of that has changed, so that is what we are conveying to Japanese investors”.
At a BCCJ event about Brexit on 8 July, panellist Jacky Scanlan-Dyas of Hogan Lovells Japan, said that continued communication is important. During sessions at the embassy in early July, she said that one of the clear messages was: “the views of Japanese corporates matter”.
“The policy makers and decision makers [in the UK] want to know what Japanese companies are thinking”, Scanlan-Dyas said. “Japanese companies have had a strong voice in the run up to the referendum and we are very much encouraging people to continue to voice their opinions going forward”.
Avoiding the worst-case scenario over the longer term is obviously essential. One optimistic voice amid the chaotic scenes in the UK belongs to Peter Tasker, founding partner at Arcus Investment Ltd.
“Uncertainty over the post-Brexit scenario may cause an air pocket in corporate investment and hiring in the UK, but there is also a huge boost to competitiveness from the pound at 30 year lows”, Tasker said. “A long period of a much weaker currency is necessary to tackle the imbalance on the external account.
“Longer-term, I agree with Lord [Mervyn] King, former governor of the Bank of England, that the difference in economic growth between ‘in’ and ‘out’ will be much smaller than was claimed during the campaign”.
UK firms operating in Japan have, thus far, stayed calm.
“While closely watching with interest developments in the UK, we do not currently anticipate an adverse impact on our chamber”, Lori Henderson MBE, BCCJ executive director, told BCCJ ACUMEN. “It is very much business as usual in Tokyo. We will be working closely with stakeholders, and engaging with relevant processes ahead. Whatever happens next with Article 50, our priority will continue to be serving our members, and upholding our mission to strengthen business ties between the UK and Japan”.
“Britain will now need to rapidly accept the referendum result and move forward with unity and common purpose”, said David Bickle, BCCJ president. “For those who have an active interest in business between Japan and the UK, this will mean working closely with our business partners, and doing all we can to demonstrate that the UK continues to be a rewarding and richly deserving European destination for Japanese investment”.
Alison Murray, executive director of the European Business Council (EBC) in Japan, told BCCJ ACUMEN she anticipates calm. “We do not expect any impact on the EBC as an organisation, since we are a pan-Europe institution and not just EU-based”, she said. “Moreover, we are a local trade-policy-oriented organisation representing European companies with interests in Japan and we expect business as usual”.
Scotland: local impacts
On the Shetland Islands of Scotland, there are signs of both the complicated nature of the referendum and the attitude towards Japanese business. While Scots in general supported remaining in the EU, John Angus, sales director of fisheries firm Shetland Catch, Ltd., said that, “fishermen have been keen to leave the EU due to the quota management”. However, he added that, “one of our main markets is the EU”.
Angus wonders whether there will be any change in the next negotiations for the fish that his firm sends to Japan. “Our business with Japan is seasonal and falls during the autumn and winter, so we don’t have any activity with them at the moment”, he said. “We have no idea how Brexit will affect our business yet; negotiations haven’t begun so we don’t know what changes will occur”.
For now, Japanese firms are uncertain of what the future holds. There is also likely to be little sign of activity from Japanese firms with UK interests until the picture becomes less clouded.
“Japanese companies will want more certainty and will adopt a wait-and-see approach until things are clearer”, said Control Risks’ Coym.
“That uncertainty is probably going to slow down direct investment from Japanese companies over the next few months.
Automakers are the most prominent example, where all are concerned about what Brexit means for future commercial relationships and long-term profitability. If companies were to divest from the UK, it would be a long-term process depending on the terms of the Brexit and on the new policies that Westminster will likely issue, too”.
Businesses that BCCJ ACUMEN spoke to were reluctant to discuss plans for the future. A spokesperson for a major Japanese firm—speaking off the record—said that, while the weak pound could prove advantageous, it could also, for example, lead to rising production costs because of parts procurement through international supply chains.
Another issue involving currency is debt. If a firm borrowed money in dollars and wanted to pay it back in sterling, they are now at risk. “Companies and institutions with significant sterling cashflows but with non-sterling debt will see the costs of servicing that debt and any related hedging rise with a fall, or substantial volatility, in the value of sterling”, according to a report by legal firm Herbert Smith Freehills LLP.
In a statement to BCCJ ACUMEN, Toyota Motor Corporation said: “We will closely monitor and analyse the impact [of Brexit] on our business operations in the UK, and how we can maintain competitiveness and secure sustainable growth, together with the UK automotive industry and other stakeholders”.
A representative of Fujitsu, Chihiro Matsumoto, said: “British people have made their decision, so from a business point of view we are watching how this will effect the economy and our customers, and then we will make decisions”.
View from Wales
One company is certain it will be staying in Britain: the snack maker Calbee, Inc. If the UK is to leave the EU, domestic demand will likely have to take on a bigger role in driving the economy than it does today and, for Calbee, it is that great British pastime—eating crisps—that is keeping it in the country.
“The factory in Wales supplies products to mainly the UK, which is the largest salty snack market in Europe”, said the firm’s Kazuka Nohara.
Calbee plans to create 100 jobs in the factory by 2018.
Prudence is likely wise, according to Arcus Investment’s Tasker. “I would also caution Japanese companies about jumping out of the frying pan into the fire”, he said.
“Relocating established manufacturing operations with their intricate supply chains to alternative destinations would be a very costly, time-consuming process. What if, then, the new host decides to leave the EU or there is a disorderly break-up of the Euro?”
Any prospective future will obviously not see the UK vanish into oblivion. As Japan has shown following its own political and economic disaster with the bursting of the bubble around 1990, crises do not necessarily have a uniform effect. Firms such as Toyota, Toray Industries, Inc., and SoftBank Group Corp. compete on the world stage. Japan is the second biggest non-EU investor in the UK.
Tokyo real estate developer Mitsui Fudosan, which is part of a group investing the equivalent of around ¥394bn into London redevelopments, is confident it can weather any Brexit storm. “The UK’s exit from the EU may dent demand from investors and office tenants”, President Masanobu Komoda said on 24 June, according to The Nikkei. “But we will continue to move forward with an eye on the market over the medium to long term”.
The firm’s projects include the redevelopment of a former BBC property in central London. Mitsui Fudosan’s composure, however, bucks the trend. A number of Britain-focused property funds have suspended trading as the risks of Brexit—in the Bank of England’s words—“have begun to crystallise”.
Financial services firms are also concerned. Daiwa Securities Group Inc. has said it is considering moving its EU headquarters out of London. Others may follow.
Tasker said that the Remain campaign’s defeat and the resultant political fallout could end up being good for Japan.
“Diplomatically, we will have more independent leeway; but the EU does not have a coherent foreign policy anyway”, he said. “It is more than likely that we row back on the golden era of intimate relations with China that was talked about last year after President [Jinping] Xi’s state visit to the UK.
That relationship was driven by David Cameron and, in particular, George Osborne. The Conservative Party’s human rights commission issued a scathing report [on 27 June] about China’s human rights record, which shows there was already significant pushback against the policy. Tilting away from China benefits Japan”.
It is unavoidable to see that a major issue for many who voted to leave the EU is immigration. Foreigners appear to be, to put it mildly, out of favour with a proportion of the population. Setting aside the feelings of people from overseas who live in the UK—many of whom now fear attacks and worry about their future—there are concerns about how the sentiment will affect Britain.
“It won’t just be a question of how the tariff situation will affect the UK as a base for general business with Europe, but also [a question of] how complicated it is going to be to hire people”, said analyst Coym. “One of the risks we are looking at is the shift on immigration policy and how that could impair hiring for multinational companies”.
David Slater, director of international business development at London & Partners, the official promoter of the capital, believes his city still has plenty to offer.
“London’s fundamental strengths as a global business centre remain in place: its unmatched, international talent base; its business-friendly environment; its deep financial markets; its global trading reach; and its warm welcome”, he said in a media statement on 4 July.
How about the rest of the country? Also on the BCCJ event panel was Simon Mather, partner at Deloitte Tohmatsu Financial Advisory LLC. He said that, while there was a question of what the referendum means for the constituent nations of the UK—given that Scotland and Northern Ireland voted to remain— the “overall macro stability of the UK is something that people need to draw comfort from”.
“Fundamentally, the political and legal institutions of Britain are very strong”, he added.
Yet, as many commentators have noted, within the UK there is a need for healing. According to results from Lord Ashcroft Polls, the population’s vote in the referendum was divided according to age, education, class, race and region. A white, older, less-educated, working-class person living outside London in England or Wales was more likely to have voted to leave.
Minimalism is always dangerous when assessing election results, but Brexit watchers will no doubt have noted that, beyond tensions based on immigration and racism, reams have been written on problems such as poverty, regional divides, and tensions between baby boomers and millennials.
And this gets to the heart of the problems Britain must now tackle if it is to remain a business centre. Can the UK, whatever transpires, convince people it has cosmopolitan and egalitarian values? Doing so probably requires drastic changes.
“Britain is more and more distracted by internal conflicts and less and less able to play an international role”, according to Harding of the Financial Times.
However, in The Japan Times on 11 July, Tina Burrett, an associate professor of political science at Sophia University and graduate of the University of Cambridge, said that a second referendum could be held after negotiations with the EU on the terms of Britain’s exit.
Burrett continued: “Even if Britain initiates Article 50, its exit from the EU is not a forgone conclusion. In two years, much will change in UK politics. During that time, the EU itself may move closer to Britain’s position. Unlimited freedom of movement, judicial activism and a commitment to further integration are British concerns shared by many voters in other European states”.
What could happen to a post-Brexit BCCJ?
The UK’s leaving the EU wouldn’t mean the BCCJ would have to relinquish its stakeholder relationship with the European Business Council in Japan (EBC), sometimes referred to as the European (EU) Chamber of Commerce in Japan.
The EBC is the trade policy arm of 16 European chambers of commerce and business associations in Japan. According to its website, it has been working to improve the trade and investment environment for European firms in Japan since 1972.
As a major stakeholder, the BCCJ supports the EBC, through an annual membership fee, to “identify issues keeping companies from achieving their full potential in Japan”, using lobbying tools such as an annual white paper: EBC Report on the Japanese Business Environment.
Currently, a number of UK firms in Japan carry out their own lobbying and advocacy efforts. They are ably supported by the British Embassy Tokyo; the British Consulate-General Osaka; other foreign chambers of commerce in Japan; and trade organisations.
It is worth noting that EU membership is not required of EBC stakeholders, as is the case of Switzerland, Norway and Iceland.