The Brexit (a mash-up of British Exit) is a term that originated when the UK voted to leave the European Union (EU) in a 2016 referendum. A quick glance at history reveals that the UK joined the European Union in 1973 to allow free trade and free movement of people for employment or immigration purposes. Fast-forward to today, the UK is finally leaving the EU on 31st January 2020.

Why is Britain leaving? On 23rd June 2016, a public referendum was held to decide whether the UK should leave or remain in the EU. 52% of voters were in favor of leaving, while 48% of voters were of the opposite view. With Britain’s departure from the EU, a substantial change is expected to arise in the political and economic scenario in various countries (such as Japan) that share close relations with the UK. In this post, we will discuss the possible impact of Brexit on the UK and Japanese markets and the future of UK-Japan relations.

Impact of Brexit on the UK

Even though the UK has not departed from the EU yet, the state has already experienced some consequences of their far-reaching decision. Over the past few years, the economy of the UK has slowed down, especially in big cities like London. The economic growth in London was only close to 1.4% in 2018 and was nil in 2019. Plus, Brexit has led to a dip in international investments in the country by 11%. For example, the Bank of America has transferred hundreds of its bankers to its Dublin and Paris offices.

Many believe that exiting the EU will tarnish the global image of the UK, and it probably won’t enjoy the same international status. How else can Brexit affect the UK?

Inflation

Depending on the new trade agreement, the UK may lose the amenity to enjoy tariff-free trading with the EU. This will transpire if the EU decides on a no-deal Brexit. If this happens, there will definitely be an increase in the costs of imports and exports in the UK.

Lack of Labor Force

With the UK opting out of the EU, freedom of movement for labor won’t be an easy one. This will reduce immigration, and thus, will affect the labor force of Britain negatively.

Increase in Traveling Cost

The overall cost of traveling and communication may also increase.

Divorce Bill

The UK will have to pay billions of Euros to settle its share of the money that the EU undertook for financing the UK when it was an EU member.

Impact of Brexit on Japan and Its Relations with the UK

Since Britain’s 2016 referendum, the economic and political situation of Britain has become quite uncertain. And this has put Japan – one of the biggest investors in the UK – in great jeopardy. Japan concentrates a major chunk of its investments in the UK, which has helped the rich Asian country earn over 500 million consumers. However, with the shocking outcome of the referendum, Japan may have to bear the brunt of the post-Brexit effects in the following economic sectors:

1. The Automotive Industry

Three of the major Japanese car manufacturing companies – Honda, Nissan, and Toyota - produce half a million cars in the UK which are then exported to other European markets. The main concern of Japan is the cost of the revised tariffs. With the obliteration of the free-trade agreement, it may not be easy to export Japanese cars.

2. The Pharmaceutical Industry

The pharmaceutical industry is also worried about the negative consequences it may have to face post-Brexit. In addition to the worries of increased tariff charges, Japanese pharmaceutical companies are worried that they may have to face delays at ports or the burden of relocation. They may also have to incur additional expenses related to medical retests, revising manufacturing licenses, etc. in case the UK fails to secure post-Brexit EU regulatory alignment.

3. The Finance Industry

London is the financial capital for all major Japanese financial sectors. After the referendum, Japan, like other European countries, was not sure whether the UK would preserve the passport and license rights. Many Japanese financial companies in London moved to other parts of Europe. For instance, Mitsubishi bank chose Amsterdam as its hub for EU security operations. Nomura Holdings and Sumitomo Matsui Financial Group claimed they would relocate to Frankfurt.

4. The Tobacco Industry

Japan’s tobacco industry is already on the move to Europe from the UK. After the Brexit referendum, the decision was made to shut down all the tobacco factories in Northern Ireland and relocate them to Eastern Europe. This will lead to the loss of over a thousand jobs in the UK.

Conclusion

Since the Brexit referendum, 54% of Japanese companies have suffered terrible financial losses. Due to the state’s political and economic instability, many major Japanese companies have relocated to other parts of Europe. According to the Financial Times, there is over a 75% chance that Honda and Toyota will close down their production in Britain. Toyota predicts that an increase in tariffs will negatively affect their sales and profits.

Therefore, investors deem it wise to manufacture their hybrid vehicles in more revenue-driving locations. The Times newspaper also reported that Nissan is under pressure to relocate its operations to a more profitable part of Europe, most probably France. One of the ways the UK can revive its strained relationship with Japan is by negotiating new trade agreements that help the profits of both states.

How Brexit Will Affect the UK and Japanese Markets