Last reviewed 7 October 2020

One of the world’s largest, wealthiest and most advanced markets, Japan is keen and ready to do more business with the UK.

Big in Japan

A country of 126 million people, Japan boasts one of the world’s strongest and greatest economies following a massive post-war expansion. The land of sushi and sumo, tea ceremonies and tatami mats, its ancient traditions meld effortlessly with ultra modernity. Until only recently, Japan was the world’s second-largest economy after the United States, but it has now been overtaken by near neighbour and arch rival, China.

This, in part, is the result of a period of relative stagnation following the heady growth in the latter half of the 20th Century, as Japan emerged from the shadows of World War Two — a war that culminated in the dropping of the first atomic bombs on the cities of Nagasaki and Hiroshima.

Since that time, as Japan’s economy has prospered and evolved, built on an embrace of new technology, its relations with the West have likewise flowered. As well as strong trade and defence links, American cultural influences like baseball have made their way into ordinary Japanese life.

Its relationship with the UK has similarly developed and there are parallels to be drawn between two proud island nation states, both steeped in tradition. In recent times, this has resulted in the agreement of the UK’s first post-Brexit trade pact, which will mean 99% of all British exports to Japan will be tariff-free.

An estimated 450 UK firms already have a permanent presence in the country, from large FTSE 100 multinationals like Barclays, GlaxoSmithKline and Rolls-Royce, to smaller players for whom Japan is a key market. There is a visible presence too, from Lush Cosmetics and Burberry coats sold on the high street, to Bass Pale Ale served up in Hobgoblin pubs.

However, relations with close neighbour, China, are still heavily influenced by the legacy of Japan’s wartime actions when it occupied much of the Eastern Asia region. This remains a great source of friction between Tokyo and Beijing to this day.

Furthermore, for all its economic success and expansive international trade links — Japan is also a major aid donor and a source of global capital and credit to the developing world — the country retains an air of mysticism and isolationism as well. Its economic success supports a high standard of living, with a long life expectancy, but Japan largely remains off the beaten track in terms of large-scale tourism. While English is spoken in business circles, Japan is very much keen to defend its unique culture, centred around the major religions of Shintoism and Buddhism.

Economic advances

Present-day Japan boasts a hugely diversified economy that has evolved out of the automobile and consumer electronics industries that exported cars, cameras and video recorders worldwide in the decades that followed the war. It propelled brands such as Nikon, Nissan, Toyota and Sharp to the forefront of consumers’ minds right across the world.

Japan rapidly emerged as a technological frontrunner in the modern era of advanced electronics, prior to the mass roll-out of computers and the emergence of the internet. This rapid post-war expansion had largely ran out of steam by the 1990s, however, leaving the country saddled with a big debt burden and dwindling economic growth that successive governments have failed to address ever since.

The events of 2020, and the coronavirus pandemic — which resulted in the postponement of the Tokyo Olympics — will have done nothing to help inject any further momentum. Car exports to Europe, North America and elsewhere have bottomed out, with Japan’s economy poised for its worst slump in decades. Moreover, it is a country facing up to a stern demographic test as well, with the oldest average population in the world, with a median age of over 48.

The Government projects there will be almost one elderly person for each person of working age by 2060 — an enormous burden for the younger generation that will strain public finances, as age-related spending rises, such as on healthcare and pensions, while the tax base shrinks. Over the same period, the current total population is expected to shrink by more than a quarter — a number broadly equivalent to the entire population of Malaysia.

A recent study by the International Monetary Fund (IMF) estimates that economic growth will decline by 0.8 percentage points on average each year over the next 40 years due to demographics alone. These great challenges — which have been referred to as “shrinkonomics” — will once more put to the test Japan’s ability to bounce back from adversity.

Bilateral trade

Against this backdrop, the UK and Japan will be looking to each other to consolidate and build upon already strong existing trade and investment links. The free trade agreement agreed in principle in September is intended to increase trade with Japan by an estimated £15.2 billion (US$11.7 billion).

The deal is tailored to the UK economy and secures additional benefits beyond the EU-Japan trade deal, giving British companies exporting to Japan a competitive advantage in a number of key areas. It will give UK businesses tariff-free trade on 99 per cent of exports to Japan, which will massively benefit British manufacturers, food and drink producers and the tech sector.

The UK's biggest tangible exports include machinery and mechanical appliances, boilers, power generation equipment and vehicles. The UK-Japan Comprehensive Economic Partnership Agreement also conveys unique and official recognition for some familiar British products.

Scottish salmon, beef and lamb are among 14 iconic products that could be protected for the first time as part of the trade deal, while Scotch whisky will also continue to benefit. For traditional exporters, such as Walkers Shortbread, which has been selling to Japan for 40 years, it is a huge boost.

Plus, it further creates improved market access for UK financial services, which make up 28 per cent of all the country’s exports to Japan. It is also welcome news for UK fintech firms operating in Japan, such as Revolut and Transferwise, opening up further space to innovate and grow.

In the other direction, the deal supports major investors in the UK like Nissan and Hitachi through reduced tariffs on parts coming from Japan, streamlined regulatory procedures and greater legal certainty for their operations. This, in turn, is expected to benefit the UK’s automobile and rail industries. International Trade Secretary Liz Truss called the deal an “historic moment” for both sides.

It is also seen as a step towards joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — which would give UK businesses a gateway to the Asia-Pacific region and help to increase resilience and diversity in supply chains.

Doing business

While Japan is a highly stable place for business and investment, with an affluent, highly-educated population, and with strong and established ties to the UK, it is also culturally and geographically distant, with a time zone nine hours ahead of GMT. As many others have proven, however, these are far from insurmountable challenges.

The UK Department for International Trade suggests that a track record of success at home can be effective in Japan too if companies are willing to take some steps to adapt to the unique business culture and customs. As well as established exports, financial services and consumer goods, the UK can play a key role in helping Japan meet coming challenges, the Department says, from technology to life sciences and in the area of energy transition.

A resource-poor country, Japan has long been dependent on imported fossil fuels and is keen to push the use of renewables, with the adoption of low-carbon energy generation and smart energy management technologies. It is also looking to decommission existing nuclear power stations, a journey it has just started following the Fukushima Dai-ichi tsunami incident in 2011.

Tokyo has largely aligned its regulatory structures to mirror the UK’s, so British firms with expertise in this niche are well placed to support efforts in this area. There are various other established industry bodies in place to support two-way trade including the Japan External Trade Organisation (Jetro).

Making the most of these opportunities post-Brexit may not be straightforward in light of the pandemic, but the Government in Tokyo has put in place numerous stimulus measures to soften the blow from Covid-19. This includes a US$2 trillion stimulus package, while the Bank of Japan has also eased monetary policy further in 2020 to aid businesses. Nonetheless, with such a strong partnership already in place and a receptive market for British goods and services, there’s no doubt it is an exciting time for UK firms to explore Japan.