Japan Inc grapples with Brexit preparations amid rising fear of no deal

5 September 2018 10:04am

24 August 2018. By Sachiko Sakamaki.

Following a warning from the European Commission last month, the UK government yesterday also raised the specter of a possible British departure from the European Union without an official agreement. As a sense of alarm takes hold, Japanese companies are advancing preparations — from relocation plans to regulatory arrangements — for a potentially chaotic Brexit.

“Anxiety is growing,” said Ryota Tsunemi, policy manager at the Japan Business Council in Europe, a lobby group in Brussels, told MLex. “As the fear of 'no deal' is rising, we’re preparing for the risks of a worst-case scenario.”

In Tokyo, the Ministry of Economy, Trade and Industry gathered 12 companies and industry representatives on Aug. 9 to send a message to Japanese businesses that they should prepare for a range of Brexit possibilities, including a no-deal scenario, and to hear their latest concerns.

A senior foreign ministry official told MLex that the biggest worry was whether London and Brussels could reach agreement on Brexit terms, including the Ireland border issue, to provide a transition period lasting until December 2020, adding that this could be challenging for the government of British Prime Minister Theresa May.

28 days later

Japan and the EU signed a free-trade agreement just last month. Japanese premier Shinzo Abe's administration is aiming to win parliamentary approval for that deal in the legislative session that kicks off in autumn. Tokyo hopes that the EU will conclude its internal procedures by January so that the trade pact will take effect on March 1, before the UK leaves the EU 28 days later, the official said.

The Japanese government has been outspoken on Brexit, calling for both the EU and the UK to minimize impacts on businesses and the world economy. The cabinet established a government task force in July 2016, and has been updating the private sector with the latest developments and listening to its concerns.

However, the foreign ministry official said the focus had now shifted from a general appeal for minimizing the fallout from Brexit to individual companies’ specific responses to it, based on their specific needs.

Planning in a void

Yet the specifics are where many companies are facing difficulty, because final arrangements for post-Brexit tariffs, customs and regulatory frameworks remain unclear.

The British government yesterday warned importers and exporters to prepare for tariffs on goods from the EU under World Trade Organization rules, but solid facts on the trade landscape after Britain leaves Europe's single market are in short supply.

“Our concerns are certainly rising, but what we can do now is limited,” said Yuichi Izumisawa, a spokesman for conglomerate Hitachi, which operates railway businesses in the UK.

Izumisawa said his company would have to address increases in the cost of components imported to the UK from the EU and elsewhere. Hitachi might consider alternative procurement arrangements for train components, but it hasn’t yet come up with a contingency plan for a no-deal Brexit.  

Izumisawa said, however, that what may come in handy in the event of a so-called "hard Brexit," was Hitachi's acquisition of an Italian railway company in 2015. That business, now named Hitachi Railway Italy, has some experience of exporting.

Automobile manufacturers are also facing mounting uncertainty, for instance a requirement to obtain type-approvals from the EU for UK-made vehicles sold in the bloc after Brexit.

A Toyota spokeswoman said the company was considering various possibilities, including type-approvals, but declined to provide details.

“We now need to understand more quickly the practical arrangements of a final trading relationship, and it is essential to avoid a ‘no deal’ scenario,” Toyota in a statement prepared on Aug. 3 for an earnings announcement.

A spokesman for auto parts supplier Calsonic Kansei told MLex that the company was watching the negotiations, but that it had no specific response to Brexit because many details that could affect its business hadn’t been settled.

Continental drift

Japanese finance sector companies have been quick off the mark in setting up EU offices to prepare for the end of passporting rights, which allow UK-based firms in the sector to do business throughout the bloc on their British licenses.

Nomura Holdings, Japan’s largest brokerage, announced in June that its newly-established Nomura Financial Products Europe, based in Frankfurt, had won approval to operate a securities business in the EU. The company will take over some of the business of its UK operation before the curtain comes down on Britain's EU membership. Nomura is also planning to shift some staff from London and to make local hires in Germany.  

Daiwa Securities Group, Mitsui Sumitomo Financial Group and Mizuho Financial Group announced plans last year to set up local operations in Frankfurt, and casualty insurer Tokio Marine won approval in May to open a subsidiary in Luxembourg to continue to provide services in Europe following Brexit.

According to a survey published in July by the Japan External Trade Organization, 21.7 percent of Japanese companies surveyed in February said they had either relocated or considered relocating operations, up from 16.5 percent in the March to April period last year.

An earlier Jetro report published last December showed that Germany was the most popular destination for Japanese firms relocating from the UK, followed by the Netherlands. Most relocations involve partial transfers of functions such as sales, management and production, according to the report.

In a likely reflection of the increasing importance of Germany for Japanese companies, network service provider Internet Initiative Japan Inc announced last month that it had set up in Düsseldorf and Frankfurt, in addition to London.

Manufacturing muddle

The Japan Business Council in Europe's Tsunemi said his biggest concerns centered on Japanese manufacturers with bases in the UK — not just involving tariffs and customs, but also regulatory issues.  

The European Commission issued a notice on medicinal products in January, requiring license holders for drugs marketed in the EU to set up operations in the bloc.

Japanese pharmaceuticals supplier Eisai is one company transferring its product licenses from its UK base to one of its offices in Europe. Eisai Europe is also planning to transfer staff responsible for ensuring drug quality and safety to the EU in preparation for Brexit.

Japan’s chemical industry has been worried about divergences between the UK’s chemical substance regulations and the EU’s Registration, Evaluation, Authorization and Restriction of Chemicals, or Reach, rules. Many Japanese companies have hired consultants in Britain to submit data to regulators, but they will need to find new representatives in the EU’s 27 member states.    

Some 1,000 Japanese companies have set up offices, shops and factories in the UK as a gateway to Europe, but Ministry of Economy, Trade and Industry Director of European Economic Policy Toshiyuki Shirai said: “That all depends on the outcome of negotiations ... the [UK’s] position as a gateway could change.”

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