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Oct 2018

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How 2018's intensified geopolitical risks could impact Japan and Asia

Source: Asia Insurance Review | Oct 2018

The structural and interconnected nature of 2018’s global risks threaten the very system on which societies, economies, and international relations are based. This report is from Marsh Broker Japan’s Satoru Hiraga.
 
 
The World Economic Forum (WEF) observed that international relationships are now playing out in increasingly diverse ways. Beyond conventional military escalations, there are emerging hard and soft power projections like cyber threats, reconfigured trade and investment links, proxy conflicts, changing alliance dynamics, and potential flashpoints relating to the global commons. Assessing and mitigating risks across all these theatres of potential conflict will require careful horizon scanning and crisis anticipation by both state and non-state actors. 
 
Top concerns in Asia
When we examine details by region (Figure 1), economic risks account for many of the top concerns in Asia, with cyber attacks rising significantly in importance. These results are derived from the WEF’s Executive Opinion Survey, which received responses from almost 12,400 leaders representing various organisations around the world. When asked about the top risks for doing business in their respective countries, Asia’s top concerns by geography include:
 
1. Economic 
  • Asset bubbles in Hong Kong
  • High unemployment in India and Korea
  • Illicit trade in Cambodia
  • Fiscal crisis in Laos
2. Environmental
  • Natural catastrophes in China and the Philippines
  • Man-made environmental crises in Vietnam
3. Geopolitical risks
  • Terrorist attacks in Singapore
  • Interstate/regional conflict in Taiwan
  • Failure of national governance in Thailand
4. Technological
  • Large-scale cyber attacks in Indonesia, Japan, and Malaysia
 
Top risks for doing business by country
 
Concerns in Japan – highlighting geopolitical risks
Specifically for Japan, executives’ top concerns for doing business in Japan are:
  • Large cyberattacks
  • Natural catastrophes
  • Interstate/regional conflicts
  • Fiscal crises
  • Terrorist attacks
 
Cyber attacks are ranked first in Japan, as in many other Asian countries. The government is trying to address this ahead of the 2019 Rugby World Cup and 2020 Olympic Games, but a shortfall in cyber security-qualified manpower remains an issue.
 
There are two geopolitical risks listed among the top five risks in Japan – interstate/regional conflict and terrorist attacks.
 
1. Interstate/regional conflict: Shifts in the balance of power have resulted in heightened tensions in the region:
  • Although the relationship with China has been improving, there remains tension, partly because of unresolved territorial claims, as well as differing interpretations of each other’s military activities and intentions. 
  • Beyond direct conflict, Japan will be affected by others’ conflicts in the region. The intensifying trade wars between the US and China can potentially hurt Japan’s export-reliant economy. Both parties are major trading partners with Japan, and there is a real threat of Japan being caught between the feuding parties.
  • We have seen a mounting rivalry in the region between the militaries of the US and China, especially in the South China Sea. Although Japan is not a claimant in the South China Sea, many countries in North and Southeast Asia have been impacted in some way by the rivalry between the two major powers. 
  • Another concern for Japan is the tension in the Korean Peninsula. Although the likelihood of a major armed conflict appears to have abated considerably, there are still many unknown factors and potential flashpoints that could spark a new conflict. 
 
  1. Terrorist attacks: Japan has a relatively lower risk of being targeted than many other countries, possibly because of its largely pacifist global stance. 
In 2015, ISIS published a list of ‘enemies of the Islamic state’ and Japan was not included. It is also ranked ninth on the Global Peace Index list of most peaceful nations. Strict laws on gun control and immigration are also likely to contribute to a lower risk of large-scale violence. However, Japan is set to host three globally significant sporting events in the coming years, which places it in the spotlight and potentially under threat of terrorist attack: Rugby World Cup – 2019, Tokyo Olympic and Paralympic Games – 2020, and the World Masters Games – 2021.
  • Many of the risks identified in Figure 3 could impact these sporting events, potentially even causing them to be cancelled or postponed. 
  • The government has stepped up security ahead of the 2020 Olympics. In June 2017, Japan passed a pre-emptive anti-terrorism law amid public protests. The law allows authorities to target conspiracies and the police can arrest suspected terrorists even before they strike.
 
Risk management solutions 
Risk management solutions come in two forms – mitigation and transfer. Both are equally important. Whether it is terrorism, natural disasters or cyber attacks, companies need to anticipate risks and develop a plan to deal with them should the need ever arise. 
 
In the case of geo-political risks, the particular impacts they result in are often out of an organisation’s control. Close monitoring of information in the public space can allow a degree of anticipation. This anticipation buys time for companies to make contingency plans, such as re-routing supply chains before disruptions occur. 
 
It is also wise to purchase the right insurance policies as a last line of defence against geopolitical risks. Risks may materialise unexpectedly, and there may be no time to react. Further, there is no sure fire way to prevent losses completely. In times of need, the payout and other forms of assistance rendered via an insurance policy, can provide a company with much-needed resources towards recovery.
 
In a world of increasing uncertainty, taking control by recognising, evaluating and then putting in place strategies and actions to mitigate and transfer risks – whether they are large scale geopolitical risks or smaller, more contained and quantifiable property risks – places a company in the best possible position to recover, should those risks eventuate.
 
Mr Satoru Hiraga is managing director and representative director, chairman of Marsh Broker Japan. He will be presenting on geopolitical risks and some common strategies to manage those risks at the upcoming PARIMA Conference taking place in Tokyo on 30 October 2018. A 
 
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