Japan Inc. to Talk Tough Over Its Deepest Brexit Fears

 | Mar 29, 2017 | 12:00 PM EDT
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Japanese big business is alarmed about the way that British Prime Minister Theresa May is handling "Brexit" and wants something done about it.

The powerful Japan Business Foundation is crafting a communiqué outlining the group's fears, according to the Financial Times, demanding that May give "deeper consideration" to how the process of leaving the European Union will affect businesses operating in Britain.

Japanese companies employ 140,000 people in the United Kingdom and have more than 1,000 subsidiaries there. "Japan Inc." fears those operations are at stake, particularly if May pushes ahead with her cavalier statement that "no deal is better than a bad deal" on Brexit. The five-page statement is due to be delivered in early April.

Known as the Keidanren in Japan, the Japan Business Foundation represents 1,340 companies in Japan, including the biggest, Toyota Motor (TM) , and many of its large-cap peers. This would be the third major statement from the Keidanren on Brexit. 

Its board is a "Who's Who" of Japanese big business, featuring the chairman not only of Toyota but also electronics maker Hitachi (HTHIY) , Japan's biggest phone company, Nippon Telegraph & Telephone (NTT) , Japan's largest life insurer, Nippon Life, oil and mining mammoth JX Holdings (JXHLY) , utility Tokyo Gas (TKGSY) , and the trading companies Mitsubishi  (MSBHY) and Mitsui  (MITSY) .

Throw in a hefty dose of the CEOs of Japan Inc. into the mix as well. Suffice to say, in a country where your corporation can become your tribe, what those chiefs have to say goes a long way.

Brexit will shave 1.4% to 5.6% off the U.K. economy, and as much as 0.3% off the world's, according to the group's chairman, Sadayuki Sakakibara. Also the chief senior adviser to textile and plastics maker Toray Industries (TRYIY) , he said as much in an open letter after the June vote.

The European Union must "prevent a negative spiral of anti-globalism and protectionism that could accelerate throughout the world," the group said in presenting its preliminary view on Brexit.

In Japan, Sakakibara warns of another negative sucking sound "whereby prolonged consumer frugality and vigorless corporate management leads to stagnating consumption and investment." That "must be avoided at all costs."

Japan this year chairs the G7 group of the world's most-advanced economies. The Keidanren urges Prime Minister Shinzo Abe and his government to use that leadership to halt the spread of nationalism, isolationism and protectionism that is taking root across the globe.

After Brexit, the Japanese government went as far as it could, in a land that prizes politeness even more than the British, in insisting that the British government protect the interests of Japanese companies. It issued a 15-page statement that "we strongly request" the U.K. to act "in a responsible manner to minimize any harmful effects on these businesses."

There proceeded a list of requests for Britain and the European Union, including maintaining current tariff rates, freedom of capital and access for labor. Japan would also like to see "cumulative rules of origin" that would presumably allow goods partly made in Britain and partly on the continent to continue wearing a "made in the E.U." tag.

The Keidanren statement comes from the heart of Japan's manufacturers and banks, but has had "minimal direct input" from the Japanese government, according to the FT. Japanese banks in particular have expressed "deep skepticism" over assurances from Britain on financial services, and "all" Japanese financial institutions are looking at transferring operations to mainland Europe, the FT states.

Japan accounts for around half of the foreign-direct investment into the U.K. from Asia. Hong Kong, Australia, Singapore, South Korea, India and China are also major contributors. Japan, India and China are the most-active players recently, George Magnus, an Oxford professor and former chief economist at UBS, writes in the Nikkei Asian Review.

The vast majority of Japanese businesses operating in Britain use it not just as a production hub but also a starting point for shipments of goods into the European Union, the world's largest trading bloc. Without the benefit of favorable tariffs, their competitive advantage evaporates.

While the British government has sought to assure Toyota and Nissan about future operations, it can't offer the same assurances for all Japanese companies with investments in Britain, Magnus notes.

On the opportunity side of the Brexit risk, Asian companies may benefit from the weaker British pound when making investments. The commercial real-estate brokerage Jones Lang LaSalle (JLL) calculates that British commercial property is now priced at a 16% discount. Investors into London office property from China, Hong Kong and Singapore should see gains of 5% to 10% this year alone, JLL believes.

On the flipside, a weak pound makes goods produced in yen more expensive for Japanese imports into Britain. Japanese companies and investors inevitably praise a weak yen.

There would also be increased opportunity for Japanese companies, Magnus believes, if the British economy skews away from financial services, which attracts the bulk of the foreign investment for now but is a mature industry. He would like to see that balance shift toward the information, communications, transportation and logistics sectors.

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