LONDON (Kyodo) -- Uncertainty surrounding the United Kingdom's 2020 exit from the European Union has reduced the number of Japanese firms operating in the country, leaving investors and analysts watching what trade promotion steps the London government will take as part of post-Brexit economic policy.
The number of Japanese companies in the kingdom fell 12 percent from 2014 to 2019 to 951, Japanese data show, a period that includes the 2016 referendum that determined the country's departure from what is now the 27-nation bloc.
Of the total, the number of manufacturers dropped 22 percent and that of financial firms decreased by over a third, according to the Foreign Ministry data.
Given the growing Japanese presence in EU member states such as Germany and the Netherlands, a report by Ninjin, a research arm of Rudlin Consulting Ltd., says, "It is hard to avoid the conclusion that this is a reaction to Brexit."
Japanese financial firms have consolidated U.K. operations and established subsidiaries in the European Union, although staffing levels remain static, according to Pernille Rudlin, who authored the report and provides research and consulting on how to approach Japanese companies in Europe.
Rudlin wrote in the report that the decline in the number of employees of Japanese companies in the United Kingdom was less marked -- down fractionally in 2017-2018 and by about 1.5 percent in 2018-2019.
In contrast, the number of Japanese firms in the nonfinancial services sector increased 28 percent from 2015 to 2019, the report says.
Recent seminars on U.K.-Japan collaboration have highlighted potential growth areas such as 5G technology, infrastructure, recruitment, outsourcing, information technology services and fintech.
Despite Brexit, the United Kingdom still has the highest stock of Japanese foreign direct investment in Europe, according to the report.
Rudlin told Kyodo News that Japanese companies still seem happy to either acquire services firms here or base their regional head offices in the country in order to take advantage of professional services such as information technology, design, marketing and education.
But she cautioned, "It remains to be seen how much of this strength was also reliant on being part of the single market, in terms of being able to sell those services to the European Union and benefit from the freedom of movement of the people providing or benefiting from those services."
Similarly, Japanese investors say that they are closely watching what kind of investor-friendly policies the U.K. government can come up with outside the single European market.
Japanese companies are relieved London finally secured a tariff-free agreement on goods with the EU last year. But it has created nontariff barriers in goods and services.
Yoshinori Katayama, president of the Japanese Chamber of Commerce and Industry in the United Kingdom, said Japanese firms are adapting to the new circumstances and continue to value professional services the country can offer.
Katayama said at a recent Asia House webinar that the United Kingdom must now come to a deal with the EU on financial services.
Minako Morita-Jaeger, a fellow at the U.K. Trade Policy Observatory at the University of Sussex, said separately that the EU-U.K. trade agreement was the "second-worst" scenario after a no-deal.
She said the traditional role the United Kingdom played as a "gateway" into the EU is "now completely gone," given issues like customs declarations and rules of origin on exports of goods.
Morita-Jaeger predicted the ending of the automatic free movement of people will make it harder for Japanese investors to recruit skilled workers from EU member states.
U.K. authorities may no longer recognize the professional qualifications of EU job applicants, for example.
Paul Patterson, chairman of the U.K.-Japan Tech Forum and head of Fujitsu Northern & Western Europe, said he is optimistic about Japanese investment in the digital sector following the Jan. 1 enforcement of a free trade agreement between London and Tokyo.
"With one of the most ambitious digital chapters yet seen in a trade deal, tech has the potential to be at the forefront of the opportunities created by the strengthened ties between the U.K. and Japan," Patterson told Kyodo News.
"We have seen the Japanese and U.K. tech sectors speak with one voice about the benefits to trade, investment and significantly increased collaboration on emerging technologies which will be critical to economic growth."