Bracing for Brexit
Jul. 4, 2016
It's been more than a week since a majority of British voters chose to leave the European Union, but the economic impact on Japan and the rest of Asia is still unclear.
Financial markets appear to have stabilized after suffering a brutal one-day loss. But corporate investors with long-term stakes in the UK and the rest of Europe have a lot on their minds.
More than 1,000 Japanese firms have offices in the UK, with total investments worth $100 billion.
Kito Seiki is an auto-parts manufacturer based in Aichi Prefecture. The man in charge is Akitaka Kitou. The first thing he does every morning is to check the Japanese currency's exchange rate.
"My concern is how the auto industry will respond if the yen appreciates," Kitou says.
His company supplies metal parts to another manufacturer affiliated with Toyota. A rising yen could affect Japanese car exports, meaning demand for auto parts would drop.
Kitou tells his employees about the situation.
"There's nothing we can do to change global trends. So we need to gather the latest information and be ready to react quickly," he says.
On June 24, the result of the Brexit referendum triggered a surge of the yen against the dollar. At one point, the greenback was worth less than 100 yen.
Japanese automakers had been counting this year on a range between ￥105 and ￥110 to the dollar. For a major exporter like Toyota, a one-yen appreciation means the loss of hundreds of millions of dollars.
The Brexit vote also sent shockwaves through the nearly 1,400 Japanese companies present in the UK. They fear the imposition of new tariffs with the EU once the country leaves the single market.
One cutlery-maker opened a branch office in London 5 years ago. Its annual sales in Europe are worth about $1 million. That's one-sixth of the company's total sales.
"The big question is how trade rules will change in the UK over the next couple of years," says the company's president, Tomoyuki Kobayashi. "In any case, we'll have to adapt to those new rules."
To protect its business with the EU, the company is considering setting up a new branch office outside the UK.
The impact could be even greater on a large conglomerate like Hitachi. The company won a major contract in 2014 to build and maintain high-speed trains in the UK.
It inaugurated a new factory last September, and the plan was to start exporting trains to the rest of Europe.
"Our concern now is whether tariffs will change. I've met several times with Prime Minister Cameron, and now we'll have to rebuild a relationship from scratch," says Hitachi Chairman Hiroaki Nakanishi.
The head of Japan's largest business federation, Keidanren, says the Brexit vote is a game-changer.
"More than 1,000 Japanese companies are operating in Britain. The premise was that the goods they made there could be sold duty-free to a market of 500 million people. The Brexit vote will have all sorts of consequences for those companies," says Keidanren Chairman Sadayuki Sakakibara.
Jacky Scanlan-Dyas, a lawyer with the firm Hogan Lovells, joined business anchors Yuko Fukushima and anchor Sho Beppu in the studio.
Fukushima: We've just seen some examples of concerns among Japanese companies. What are you hearing from your side?
Scanlan-Dyas: As you mentioned, Hogan Lovells is a global law firm, and we've been talking to clients around the world about Brexit, which is Britain's potential exit from the EU. Here in Tokyo, we held 2 seminars last week and spoke to about 70 clients, and I am speaking again in Osaka tomorrow. The message that I'm getting from our Japanese clients is that they're concerned about three things.
First of all, they're concerned about the Article 50. They want to know about it. Who can give it? What's the process? This is the formal notice that may be given by the UK should they choose to leave the EU.
Secondly, Japanese businesses are concerned about the impact of Brexit on their existing European and UK businesses. And they want to know how Brexit is going to affect them. They also want to know about new investment decision going into the UK. And lastly, they're concerned about the future. They want to know what the EU-UK trading arrangements are going to look like going forward, and whether the UK will have access to the single market.
Beppu: What advice are you giving to Japanese firms? Is this something that they could rather start now?
Scanlan-Dyas: The referendum itself is not legally binding and at the moment no laws have changed in the UK as a result of the referendum. So our message to Japanese clients is that this is not the time to make fundamental change. This is the time to analyze, communicate, plan and to influence. And if it's ok I'm going to go over those four points in a little more detail.
Firstly, analyze. We are helping Japanese businesses analyze how EU laws affect their business and which ones are a priority in these trade negotiations going, forward.
Secondly, communicate. It was terrific to see Japanese corporates expressing their views on the Brexit issue in the months leading up to the referendum and we're encouraging them to keep communicating going forward. It is important to remember that Japan is one of the 2 biggest investors into the UK. Japanese corporate views are very important to the UK policymakers. They want to know their priorities and concerns so they can take them into account in the negotiations going forward.
Thirdly, plan. We are helping clients prepare action plans for the future.
And lastly, influence. This is a negotiation about trade. We're helping clients speak to the policymakers in Brussels and in London, and in the member-state capitals, to ensure that their priorities are not the areas of compromise in the trade negotiations in the future.
Beppu: We here a lot of voices of concerns obviously from Japanese companies But aren't there any positive points, positive impacts that companies can take from this?
Scanlan-Dyas: That's an interesting question. Whenever you have change, you often have opportunity. Now if we think about the UK at the moment, we have a very low pound. We also have very cheap interest rates and they might be cut further. So if you think about it, the cost of funding an acquisition in the UK is comparatively low at the moment. You could say the UK is on sale. Also, a number of companies we're talking to are taking a wait-and-see approach, so there's not so much competition for the assets that are on sale. So for a brave investor, this could be an opportunity to invest in the UK.
Fukushima:How will Brexit impact companies elsewhere in Asia, and how are they reacting?
Scanlan-Dyas: It's interesting that you ask that. I was speaking to my colleagues in Shanghai last week and their view is somewhat different to the view I'm hearing in Japan. Our Japanese clients typically invest for long-term relationships, not short-term profits. The view in China is not necessarily the same. And I understand some companies are active in seeking UK negotiations now.
Fukushima: What should Asian companies keep in mind when it comes to the impact of Brexit on the UK economy?
Scanlan-Dyas: Well, in the short-term, of course they're going to have some concerns. There is uncertainty and Japanese businesses do not like uncertainty. And this uncertainty is likely to continue until such time that the EU can clarify their future trading relationship, and we understand what access the UK will get to the single market. So it's natural that some investment decisions won't be taken and some businesses will suffer.
But long-term, I think the fundamentals of the UK economy are strong and many of the reasons Japanese businesses invest in the UK have not changed. For example, there's a good business culture, business is conducted in English, there are high standards of corporate governance, there are good schools for expats, and of course there's the wonderful weather. I'm joking about the weather.