Last week’s Integrated Review made it clear that Asia will be increasingly important to the
UK as the world’s economic and strategic balance shifts towards the region. Commentators
have emphasised the need for Britain to bolster security ties with regional partners like
Japan – a country which shares many economic dynamics with the UK, and a similar global
But while security cooperation is of course important, there are also opportunities for the UK
and Japan, working more closely together, to emerge as world leaders in areas that will
define the century ahead, such as digital trade and climate change, as well as boosting the
UK’s positive presence in Asia. And these are areas in which the UK’s financial and services
sector can play a central role.
Ever since the relationship blossomed in the 1980s, trade between Japan and the UK has
risen steadily, totalling more than £30bn in 2019. Brexit posed a challenge to the
relationship, but with the UK-EU FTA alleviating the worst of Japanese fears, and the UK-
Japan CEPA concluded last year, policymakers are starting to explore new directions in
which to take this key economic partnership.
If the UK does want to become a bigger player in Asia, its partnership with Japan offers a
golden opportunity to make a positive impact in the region. According to an Asia House report published earlier this month, Tokyo and London are extremely well placed to
cooperate on one of Asia’s most pressing challenges – the yawning infrastructure gap,
recently valued at US$26tn by the Asian Development Bank.
The age-old challenge here is infrastructure financing, with capital and risk deterring
investors. However, the establishment of strong legal frameworks and investment structures
– a key strength of the City – combined with London and Tokyo’s deep finance pools could
revolutionise Asia’s infrastructure investment landscape.
The UK can offer capital and an investor base, expertise in the world’s leading speciality risk insurance market, and bespoke advisory services to support infrastructure financing. Japan has similar expertise and, crucially, extensive experience in Asian markets, being the largest infrastructure investor in Southeast Asia – a fact that is often overlooked.
Given the growth potential that infrastructure unlocks, it is in both countries’ interests, as
proponents of global trade, to help meet Asia’s infrastructure demand.
However, it isn’t just infrastructure that could be transformed by a closer UK-Japan
partnership. Perhaps the most innovative aspects of last year’s trade agreement are its
digital chapters, which include provisions for increased data flows, among other digital-
forward aspects. Companies expanding into either market, for example, are protected from
having to disclose business-sensitive information such as artificial intelligence algorithms
and encryption keys.
Given Japan and the UK’s strengths in innovation – they are both prioritising digital in their
economic strategies – it is well within their interests to build on these policy innovations and
play an active role in shaping the global digital trade system, especially given the significant
risk of a splintering of digital trade policy. Such a splintering could stifle the UK and Japan’s
performance in the sectors they are banking on for future growth.
But perhaps it is climate change where the UK and Japan can have the most profound and
important impact. London and Tokyo can lead the charge by doubling down on their financial
services strengths, building a connected powerhouse for global green finance.
Japan’s green finance activities have rocketed in recent years, with US$17 billion in
cumulative issuances in 2019. It now ranks second in the Asia-Pacific for green finance.
In the UK, the London Stock Exchange was the world’s first to introduce a dedicated green
bond segment, which is now home to the first certified green bonds out of China, India, and
the Middle East.
By exploiting these synergies, the UK and Japan could position themselves as world leaders in sustainable finance – with COP26 presenting a particular opportunity to drive commitments on green finance and establish the rules of the game moving forward.
As the UK looks increasingly to Asia, a closer partnership with Japan could see “Global
Britain” play a positive role in the world. But the partners must play to their strengths. The
financial and services sector should be central to UK engagement with Japan.