If non-EU countries economic interests continue to be threatened, 15-page report may well be the first of many warning shots
The Japanese governments letter setting out its Brexit demands is deeply troubling to the UK since it is clear Japanese companies want Theresa May to negotiate a deal that leaves Britain not just in the EU customs union, and single market, but also retains a free flow of workers between the EU and the UK.
The British government could not possibly accede to these demands if Mays mantra that Brexit means Brexit is to mean anything. Yet the Japanese requests set out in a 15-page memo are likely to become the benchmark by which many countries with strong economic ties to the UK will judge the outcome of the talks.
Above all, the Japanese memo underlines that the UK is not only negotiating bilaterally with the EU commission and council of ministers, but with many other foreign firms that have invested in the UK, each of which is quite capable of upping sticks in the next phase of their investment cycle.
The fear for Downing Street is that other non-EU countries under internal pressure from their business communities will now follow the Japanese example and publicly set out the parameters of an acceptable deal from the point of view of their UK-based companies. China, for instance, is not known for its diplomatic subtlety when commercial interests are at stake. Other countries in east Asia may also make their views known.
Moreover, there is little downside for Brussels if during the talks third parties such as Japan warn the UK that unless it is flexible over the single market, consequences will follow.
The additional difficulty for May is timing. Her government is still far from united in its demands and is playing a long game by remaining studiously vague about the deal she is targeting. Bland reassurance has been Mays strategic goal so far.
The Japanese demands blow that strategy apart by being very specific. It says: What Japanese businesses in Europe most wish to avoid is the situation in which they are unable to discern clearly the way the negotiations are going, only grasping the whole picture at the last minute. It is imperative that the outcome is free of unpleasant surprises and reducing the risks emanating from uncertainty.
In effect Japan is trying to force the UK to show its hand, something five House of Lords EU select committees will also start to seek to achieve this week when they begin a coordinated grilling of ministers and experts across the whole Brexit field.
Nor can the UK government easily dismiss the reports status. A working group chaired by Koichi Hagiuda, deputy chief cabinet secretary and a former aide to the prime minister, Shinzo Abe, compiled the 15-page set of demands.
Hagiuda served Abe from 2013 to 2015 as the special adviser to the president of the Liberal Democratic party and, as such, intimately represents the thinking of the Japanese government and business.
The Japanese insist they are not telling a sovereign power how to negotiate, but just defending Japanese interests. Japanese firms, after all, employ about 140,000 workers in the UK, with Nomura bank, manufacturing corporation Hitachi and carmakers Honda, Nissan and Toyota all having large bases in the country.
Nevertheless the UK government was ill-prepared for the intervention. Although the report was published in Japan on Friday and sent to Downing Street in advance of publication, its contents seem to have come as a shock on Sunday to a government expecting such lobbying to be conducted in private. May is likely to discuss the report at a meeting with Abe on Monday.
The warning in the covering letter to the UK government could not be clearer. It says: Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to continental Europe if EU laws cease to be applicable in the UK after its withdrawal.
In particular, the document emphasises Japanese firms fear for their future potential to export from Britain to third countries because of trade privileges within the EU single market around rules of origin.
Brexit would make such products unable to meet the rules of origin as EU products, which means that Japanese companies operating in the EU would not be able to enjoy the benefit of the free trade areas concluded by the EU, the report says.
It also calls on the UK to maintain access to workers who are nationals of the UK or the EU, saying the European labour market could suffer great turmoil if EU nationals could not freely travel between the UK and continental Europe.
Japanese banks will move their European HQs out of London if the Brexit negotiations fail to secure the financial services passport to operate in the EU, the report says. If Japanese financial institutions are unable to maintain the single passport obtained in the UK, they would face difficulties in their business operations in the EU and might have to acquire corporate status within the EU anew and obtain the passport again, or to relocate their operations from the UK to existing establishments in the EU, it says.
None of these demands are totally new, but to see them spelled out in such an ambitious way by such an important investor in the UK underlines the economic interests at stake. If those interests continue to be threatened, do not expect the normal diplomatic niceties to apply. This letter may well be the first of many warning shots.