Business | FOCUS

For Japanese firms, U.K. election win by Boris Johnson unlikely to assuage 'hard Brexit' fears

by William Hollingworth

Kyodo

The likely re-election of Prime Minister Boris Johnson will not end the Brexit uncertainty for Japanese firms that are also worried about the impact of his “hard Brexit” vision for the country, according to trade experts.

Polls indicate Johnson’s Conservative Party will win a majority in December’s general election, leading to Britain’s formal departure at the end of January and then negotiations on a free trade agreement.

Johnson says the trade deal has to be in place by the end of next year, leading to fears of another no-deal cliff edge for Japanese firms that, along with the rest of British industry, have been hampered by parliamentary deadlock on the way ahead since the 2016 referendum result.

Trade experts believe the deal will instead take several years to negotiate and, in the long run, will create more trade friction and costs than was envisaged under Johnson’s predecessor. Theresa May’s plan, which envisaged closer customs and regulatory cooperation, was considered a softer form of Brexit.

The Japanese government and businesses with complex supply chains across Europe have long called for the maintenance of frictionless trade post-Brexit.

Pernille Rudlin, a representative for Japan Intercultural Consulting, a training and consulting firm with links to many Japanese investors in Europe, said Johnson’s re-election would usher in another period of prolonged uncertainty, which will hurt inward investment.

“I hear rumors most firms have plans to deal with a ‘hard’ Brexit and if I was advising them, which I don’t, it would be to prepare for the worst-possible scenario,” she said.

“What will be worrying to many companies is Johnson’s refusal to extend the transition period beyond the end of 2020,” Rudlin said.

“I think Japanese firms would like longer to transition to a new trading arrangement, and I think these negotiations will take longer than just one year.”

Rudlin said that, while not the primary factor, Brexit contributed to Honda Motor Co.’s decision earlier in the year to end production in Britain. She adds it is “fairly inevitable” Honda’s suppliers will also leave Britain if, as seems likely, they will not be able to seamlessly supply parts to other manufacturers in the European Union. Nissan Motor Co. lowered ambitions recently for its Sunderland plant.

She added that question marks remain over Toyota Motor Corp.’s presence given the fact it will soon have spare capacity in Eastern Europe.

Rudlin says what is more worrying is the potential loss of service sector investment.

Many Japanese firms have set up subsidiaries and transferred head office functions to the remaining 27 European Union member nations.

This is because there are question marks over access to data, hiring and movement of staff and the ability to service financial clients. Other firms have moved warehousing, distribution and invoicing to the continent.

Rudlin explained that the nature of Japanese investment into Britain has changed. In the past, it tended to be Japanese firms setting up new operations on greenfield sites and using Britain as a gateway to the rest of the European Union.

Nowadays, a lot of the investment tends to be in the form of Japanese companies acquiring British firms, which are essentially serving a domestic audience that will be largely unaffected by Brexit.

“Japan is still positive about Britain, but Brexit has made it a higher risk,” she said. “And I don’t think either Boris Johnson or Jeremy Corbyn, the opposition leader, becoming prime minister will help.”

Minako Morita-Jaeger, a fellow of the U.K. Trade Policy Observatory at the University of Sussex, said: “Japanese manufacturers have already spent time and money preparing for a no-deal and Brexit. The U.K.’s relative attractiveness is diminishing continuously and Boris Johnson’s deal doesn’t help to stop that.”

She highlighted a recent survey of Japanese investors which found Britain to have the most “fragile” business environment in the European Union.

Morita-Jaeger said: “In Boris’ deal there is not the same level of regulatory alignment as under May’s deal. Boris’ dream is regulatory divergence and this creates more trade frictions in the form of customs and rules of origin checks.”

She said services is the growth area in terms of Japanese investments, but this could be put at risk if firms are unable to benefit from freedom of movement as part of the EU’s single market.

In future years, neither Rudlin nor Morita-Jaeger are optimistic Britain will be able to improve on the terms of the EU-Japan free trade deal.

“The Japanese are no longer going to be as nice to us as they could have been. They’re going to get quite tough on things which they conceded to the EU,” Rudlin said.

Morita-Jaeger sees a U.K.-Japan deal could go further on regulatory cooperation on e-commerce.

Speaking at a recent reception in Parliament, Koji Tsuruoka, Japan’s ambassador to Britain, said Japanese companies are hoping the exit from the EU will be “smooth.” He added that despite the uncertainty, he is confident Japanese companies will still invest in Britain.

He said Britain receives 40 percent of total Japanese direct investment into the European Union and the last two years has seen a rise in the total.