When the British prime minister Theresa May stepped off the plane in Osaka at the start of her first official visit to Japan, she wore a red and white outfit to match the colours of the country’s national flag.
It was a gesture of goodwill to the UK’s largest Asian investor at a time when the relationship between Britain and Japan has been strained by Brexit. Mrs May set out her agenda before taking tea with her Japanese counterpart Shinzo Abe in Kyoto.
“I’m going to talk to Mr Abe about the future relationship between the United Kingdom and Japan and about how we can build upon what is already a good strong relationship in the areas of security, defence and trade,” she told journalists.
Will she stay as PM?
Her agenda was upset by British reporters’ questions about how long she would remain as prime minister and if she would lead her party, the Conservatives, to fight the next general election.
However, the business community in Japan has limited interest in Britain’s domestic politics. It is much more interested in how Mrs May will lead Britain out of the EU and what the deal with Europe will look like at the end of the process. Under current plans, Britain is set to leave both the single market and the customs union, putting future trade with the EU in jeopardy.
“Anxious and bewildered”
This has left Japanese companies “bewildered and anxious,” according to Professor Seijiro Takeshita from Shizuoka University.
More than a thousand Japanese companies have offices registered in Britain, employing around 150,000 people. Many of them chose the UK as a base from which to reach the market of the European Union.
Professor Takeshita says that the Japanese companies are frustrated by the slow progress in the Brexit negotiations. “The longer those talks take, the more the Japanese companies in the UK will look to relocate parts of their business to the continent,” he says.
The head of Nissan, Carlos Ghosn, has also said that long-term investment by Japanese companies in Britain will be affected by its relations with the EU. Nissan has a large factory in the North East of England, a region which was strongly in favour of the Brexit.
The British government has tried to reassure Japanese businesses that Britain will be open to trade with other parts of the world after it leaves the EU and it that stands ready to agree a free trade deal with Japan.
However, this promise has often been met with scepticism. Stephen Porter, an art dealer with links to Japan, says: “The Japanese are terrified of losing access to the world’s biggest free trade area. Many Japanese companies based themselves in Britain specifically because they, quite reasonably, thought that doing so would give permanent access to the EU.”
Mr Porter, a founding partner of Arthistorical in London, warns that: “Mrs May could well be publicly humiliated if Shinzo Abe openly expresses – as well he might – the widely-held view in Japan that Britain has unfairly reneged on its commercial commitments by allowing the Brexit to happen.”
Banks on the move
Another concern is the possible departure of banks and financial institutions from London to continental Europe. Hideki Kishida, a Senior Economist at Nomura Securities, observes that “some financial institutions have already announced that they are prepared to move a certain number of jobs from London to the European continent to retain the single passport system which enables them to operate within the EU. That is not good for the UK.”
The goal for Mrs May is to secure an agreement from Japan for a free trade deal, like the one Japan has recently agreed in principle with the EU. Yet Britain is constrained from entering such negotiations with Japan until the Brexit process is completed. Likewise, Japan wishes to settle its arrangements with the Europeans before it starts talk with the British.
Professor Takeshita from Shizuoka University hopes that when the UK-Japan talks eventually start, the two sides will quickly find common ground. “There is a lot of similarity in terms of values and ideology of trade and business between the Britain and Japan and that should help the FTA talks,” he says.
Furthermore, Japanese companies are keen to invest abroad, provided the political and economic risks do not appear too severe. Since the start of 2017, profits at Japanese companies have been rising in Japan alongside a rise in value for the yen and this motivates many cash-rich Japanese firms to expand overseas. Provided Britain avoids a deep recession and the Brexit negotiations remain track, it should remain a relatively attractive investment destination for Japanese companies.
Aside from trade, Prime Minister May also declared the UK’s support for Japan’s defence objectives, including its bid for a permanent position on the United Nations Security Council. She visited an aircraft carrier in Tokyo and announced that UK troops would soon take part in joint military exercises in Japan, the second country to do so after the US.
The tense situation in East Asia was emphasised when North Korea fired another missile near Japan just before Mrs May arrived in Osaka. The Prime Minister condemned the action but the UK is a relatively minor player in the region and has little ability to influence affairs on the Korean peninsula.