Focus on Japan - JLT

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FOCUS ON JAPAN
DECEMBER 2009
Japan’s
risk rating
Legal and
regulatory risk
Strikes, riots and
civil commotion
Terrorism
Overall Japan has a relatively benign
risk profile. However, there is one
particularly striking exception:
economic risk. Recession and deflation have
brought serious concerns for both businesses
and a government forced to rapidly increase
borrowing. Structural imbalances in the
country have exacerbated these issues, with a
shortage of natural resources and an ageing
population hampering the response.
Elizabeth Stephens, Head of Credit &
Political Risk Analysis at Jardine Lloyd
Thompson explains: “Japan has suffered
from deflation, exports have fallen 26 per
cent and there has been a 15 per cent drop in
GDP over the past 12 months. The economy
isn’t in that great shape.” Japan is, in fact,
expected to be overtaken by China as the
second largest economy in the world by the
end of 2010. All these factors are reflected in
an economic risk rating of 5.
The World Risk Review compares
countries in terms of how well placed they
are to deal with economic challenges, as well
as where they are in the economic cycle.
Japan is struggling here too. Problems are
compounded by structural issues, including
an ageing population, which gives it little
room for manoeuvre, and a shortage of
natural resources. Some 96 per cent of these
have to be imported. Stephens explains:
“There is talk of allowing the yen to
appreciate. It has been traditionally thought
to be too difficult, as it would increase the
cost of exports, but it is being considered in
order to bring down the price of imports.”
In an effort to deal with economic
problems, Japan, like many other OECD
countries has taken on a lot of debt, resulting
in a downgrading by Moody’s in the
summer. This has raised the sovereign credit
risk rating to 2. Stephens says: “The
economy isn’t going to crash like Iceland,
but it will take a long time to rebound.” The
new government has also promised to
increase spending, which has raised concerns
of how it will be paid for. “It may be through
more borrowing or more taxes, so businesses
are also concerned about possible tax
increases.”
Contract
agreement
repudiation
Expropriation
Sovereign
credit risk
Beyond the economy, the next risk is the
threat of strikes, riots and civil commotion,
rated as 2. Stephens says these are not an
imminent danger. However: “There were
demonstrations in the run up to the election,
and there are also labour reforms which have
to be passed.” The country also faces tension
over immigration and has a history of ultranationalist
disturbances, but as Stephens
says: “This is a honeymoon period for the
new government, so tensions died down.”
World Risk Review
The World Risk Review
provides short- to mediumterm
assessments of the
level of risk associated with
a range of political and
economic perils that may
impact upon business.
The risk review rates nine
perils in 197 countries and
territories, captured under
the broad categories of
political violence, the trading
environment and the
investment environment.
The model is designed to
enable companies to
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effectively identify the perils
that may impact on their
business and deliver an
understanding of the relative
level of risk associated with
each peril, using a scale of 1
(low) to 10 (high).
The model incorporates
independently verifiable
data from 53 international
sources, drawn from Europe,
North America, Australia, Asia
and the Middle East.
The diversity and breadth
of the data sources is
intended to reduce, to the
Currency
inconvertability
and transfer risk
World Risk Review ratings for Japan
TM
War and civil war
Country
economic risk
War has a rating of 2, as there are
tensions with North Korea. Stephens says:
“Japan is nervous that North Korea is
testing nuclear weapons, although under the
leadership of Kim Jong-il the country is
very good at escalating tensions and then
stepping back from the brink.”
Other risks with a rating of 2, such as
regulatory risk, are partly due to the
election of a new government which raised
the likelihood of changing regulation. RS
greatest extent possible,
cultural bias, political
influence and personal
interpretation.
This approach contributes
significantly to the
robustness and integrity of
the model and recognises
that most country risk ratings
available to the business
have traditionally been
heavily influenced by western
bias reflecting the historical
dominance of western
foreign investors and trading
businesses.
For more details and to register for this free service go to www.jltgroup.com/worldriskreview
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