Japan's value to a post-Brexit Britain explained

(c) Sky News 2017: <a href="http://news.sky.com/story/japans-value-to-a-post-brexit-britain-explained-11012562">Japan's value to a post-Brexit Britain explained</a>

Japan is one of the UK's most important trading partners.

In 2015, according to data published by the Office for National Statistics, it was the 11th largest buyer of UK exports, buying £10.5bn worth of British goods and services, putting it ahead of the likes of the United Arab Emirates, India, Australia, Canada and Russia.

Britain is also a major buyer of Japanese goods, buying £9.6bn worth of goods and services that year, making the Land of the Rising Sun the 14th biggest supplier of imports to the UK.

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Strikingly, despite the very long history of Japan selling Britain manufactured items such as electrical goods, Britain enjoyed a trade surplus with Japan in 2015 for the first time in at least 16 years.

The strength of British exports to Japan is all the more impressive given the "gravity model of trade", developed by economists over many years, which holds that the two biggest factors influencing trade ties between two countries are the size of the two economies and the distance between them.

In short, the closer a country is to another, the more likely it is to trade goods and services with it. It is quite remarkable that Britain exports more to Japan, which is more than 9,000 miles away, than it does to Sweden, which is on our doorstep.

Japan is also a crucial investor in Britain. In 2015, its companies were the fourth-largest overseas investors in the UK, while in 2016 alone, Japanese investors ploughed £27bn into buying 37 UK businesses, most notably the chip designer ARM Holdings (LSE: ARM.L - news) .

In total, there are around 1,100 Japanese-owned businesses in the UK, accounting for some 140,000 jobs.

The best-known example of Japanese investment into Britain is in car-making. Nissan made 478,000 cars in Britain last year, of which around 80% were exported to the EU, while Toyota made 196,000 in the UK, nine in 10 of which went to the EU.

Katsunori Kitakura, lead strategist at Sumitomo Mitsui Trust, one of Japan's largest asset management firms, said: "An increase in costs following Brexit could lead to a decline in Japanese investment in the UK and the relocation of production bases to other EU countries.

"As such, the ongoing negotiations between the UK and the EU will be crucial for the future investment relationship between the UK and Japan.

"Japanese companies want to continue their investments in the UK after Brexit. However, the UK government will need to respond to their requests and take measures to maintain the same business environment that is currently in place as far as possible."

He said Japanese manufacturers exporting from Britain to the EU were concerned about higher tariffs on exports following Brexit and also about tariffs on parts imported from the EU to the UK.

Nor is Japanese investment in UK manufacturing confined to car-making.

One of Britain's best-known manufacturers, the renowned St Helens-based glassmaker Pilkington, is owned by Nippon Sheet Glass.

Hitachi, which developed Japan's famous "bullet" trains, built the javelin trains used on the high-speed rail link from London to the Channel tunnel at its site in Newton Aycliffe, Co Durham, which is currently producing new inter-city high-speed trains for the Great Western and East Coast Mainlines.

Apart from the manufacturing sector, Mr Kitakura also highlighted the financial services sector, which is watching Brexit negotiations closely.

He added: "Many major Japanese financial institutions have their European operations based in the UK.

"If the EU single passport expires, it will be necessary to review office locations and staffing arrangements, In fact, Japanese financial companies have already begun steps to establish core bases in continental Europe in preparation for Brexit."

The facts speak for themselves. Japan, with its history of patient investment for the long term and promoting technical excellence, is a crucial, vital trading partner for the UK and one whose views our politicians must take seriously.