Japan Inc upset with Brexit uncertainty

Workers on the sealer line in the paint department of the Honda automobile plant in Marysville, Ohio.
Paul Vernon | Reuters
Workers on the sealer line in the paint department of the Honda automobile plant in Marysville, Ohio.

Japanese officials want "an uninterrupted and transparent" Brexit process as exporters highlight concerns over their presence in the U.K. and future access to the EU's single market.

In a memo prepared by the Japanese government and business task force, and seen by CNBC, Japan asked British and European officials to ensure "predictability" during the divorce process and thus offset any economic impact for Japanese businesses.

"Uncertainty is a major concern for an economy. We hope that predictability is secured whereby all stakeholders, not just the negotiating parties, have a clear idea of the post-Brexit landscape," the memo said.

"This will be possible if the Brexit negotiations are conducted through an uninterrupted and transparent process, which could include arrangements such as the establishment of a provisional period and, if there need to be institutional changes, the granting of time for the transition and publicizing of such changes," the document read.

Many Japanese firms, from banks to automakers, have established production bases in the UK taking advantage of tariff-free trade with the rest of Europe. According to Nikko Asset Management, 2015 saw a 10-year high for total auto production in the U.K. from Japanese firms – 1.58 million cars were produced, of which 57.5 percent were sold in the EU's single market.

"Overall, the feeling in government circles in Japan is one of betrayal, and in the corporate sector one of disbelief," Karel Lannoo, chief executive officer at the Centre for European Policy Studies, told CNBC on Friday.

Lannoo, who spoke with Japanese officials last week, added: "The U.K. was sold as a gateway to the EU, which is now gone. The corporate sector is busily exploring other location possibilities, of which we have read in the media."

Some of the biggest Japanese firms in the U.K. market include: Fujitsu, Toyota, Nissan and Honda. Nissan decided to give the greenlight to new production in the U.K., despite concerns over Brexit, because it could not postpone the decision.

"We had to make a decision on investment now," Carlos Ghosn, chairman and chief executive officer of Renault-Nissan Alliance told CNBC earlier this month, adding that the British government gave "reassurances" that the firms competitiveness would not be undermined.

Guardsmen line the Mall for the annual Trooping the Colour ceremony in central London
Toby Melville | Reuters

The European Union with its 500 million consumers is a valuable market for corporations to tap into. With the U.K. set to leave the trading bloc, corporations exporting to Europe would incur additional costs should tariffs be imposed.

"It is in the common interest of all Asian countries as a whole that they continue to have access to the free market of Europe, including the UK," the memo seen by CNBC read.

The same document showed that Japanese firms requested both the U.K. and the EU, maintain "current tariffs", "access to workers who are nationals of the U.K. or the EU", and "provision of financial services, including the "single-passport" system.

In a note last month, Nikko Asset management said: "There are a number of areas though where it's extremely likely that changes will occur. It will be impossible for example for the U.K. to not tighten controls on EU migration and rules for non EU migrants are due to be tightened further rather than liberalized."

Ultimately, the investment firm believes that Japanese businesses will be faced with an investment dilemma.

"Many firms will then need to carefully weigh up the advantages and disadvantages of further investment in the U.K. and EU. If the two sides are unable to agree on trade and thus tariffs are imposed then it's likely that UK based Japanese manufacturers will either experience lower margins or face lower sales in the EU unless they relocate from the U.K. to the EU.

"If they maintain production within the U.K. market, however, they will become more competitive in that market as they will not be subject to tariffs, and are likely to be able to take market share from EU based competitors," the investment firm added.

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