Stronger ties than EMU bind Japan and UK

The single currency might not be as crucial to investment as the Toyota chairman believes, writes Richard Lloyd Parry in Tokyo

The hints dropped by Hiroshi Okuda, the chairman of Toyota, about the possible suspension of his company's investment in Britain, if the country opts out of European Monetary Union, conjure up a painful vision: of a Britain abandoned by foreign manufacturers, lagging lamely behind its integrated European competitors in the race for Asian jobs and factories.

"If we are going to be a sort of fringe nation, a sort of follow- on country, then all these big Asian countries are not going to be terribly interested," said the MP, Edwina Currie, whose Derbyshire constituency contains Toyota's biggest European plant. From Tokyo, however, the picture is more complicated: the ramifications of EMU membership are only one among several reasons for firms like Toyota to slow down expansion in Britain in favour of the continent.

In its outlines, Britain's record in attracting Japanese money is excellent. Forty per cent of Japanese investment in Europe goes to the UK, creating some 60,000 jobs. Twenty-six new Japanese operations opened last year, the largest annual increase since 1990. As Downing Street was quick to point out this week, Mr Okuda has not been behaving like a man who is done with Britain: Toyota is presently building a pounds 200m extension to its Derbyshire factory, which has already cost it pounds 880m.

Good infrastructure, a skilled work force, manageable unions, incentive subsidy and, compared to France and Germany, low labour costs are only part of the reason for this huge share. The English language, the second tongue of almost all Japanese, has a lot to do with it, and so too does a sentimental, but genuine, sense of affinity with the British as a race - another tea-drinking island people uneasily perched on the edge of a historically unpredictable continent.

There is more to the attraction of Britain than simply the bottom line, but Japanese manufacturers do not come solely, or even mostly, for the British market. Toyota's Derby factory exports to Latin America, the Middle East and Africa, as well as Europe. When European limits on Japanese market share ease (probably in 1999), the potential for car makers will become even greater, and they are already setting their sights on new markets in the former Soviet bloc.

Geographically, there are many more obvious choices than Derby or Tyneside - when the truck maker Isuzu recently chose the location for a new engine plant, the British bid lost out to Poland. "People put plants overseas for all kinds of reasons," said Andrew Blair-Smith, autos analyst for the British investment bank BZW in Tokyo. "Having established a good production base in the UK, it makes economic common sense to spread around a bit."

The beauty of monetary union is simply that it will remove the risks associated with exchange rate fluctuation. "If a firm like Toyota costs its cars in sterling, and sterling goes north against the euro, then it will be much more difficult to sell them in Europe," says Mr Blair-Smith.

"Japanese businessmen very much like the British people, and in an integrated Europe they will still want Europe as a base of operations, an English- speaking centre of finance and communications," says Yasuhiko Shirahama, senior analyst at the Japan Institute for Social and Economic Affairs. "But if Britain is outside the EMU, I am sorry to say that they will go elsewhere."

Not everyone agrees. The way in which national European currencies are replaced by the euro is a cause of concern for banks and insurance companies with assets denominated in deutschmarks, francs and lire. "From the point of view of financial institutions, it is not a bad idea for Britain to join EMU," says one life insurer. "But there's no reason why it should join just now. If Japanese firms become worried about the currency change, then sterling could become a way of hedging their assets."

Earlier this month, Chancellor Kenneth Clarke visited Tokyo to explain Britain's position on EMU. From the evidence of Mr Okuda's remarks, he still has a lot more explaining to do.