Global Risk Analysis Project, PHP Institute, Inc.

PHP Global Risk Analysis

2018（Summary）

© 2018 PHP Institute, Inc.
All rights reserved.
Neither this summary nor excerpts thereof may be reprinted, copied, or retranslated
without the express permission of the PHP Institute, Inc. Citations must specify thesummary as a source.
The views expressed herein are those of the project as a group and do not necessarily
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Publisher: Toshio Nagahisa (Chief Research Officer)
PHP Institute, Inc.
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E-mail: think2@php.co.jp

English Summary of the “2018 PHP Global Risk Analysis” Report
Introduction
This English-language document summarizes the salient points of the “2018 PHPGlobal Risk Analysis” report in Japanese released in December 2017 by PHP Sōken(PHP Research Institute), the policy think tank of the PHP Institute.
In today’s age of globalization, an event in one place can have an impact
elsewhere via unexpected paths. Uncertainty has been a feature of international
affairs in every age, but today the fog of unpredictability has become thicker thanbefore. So it is advantageous to pick up on the advance signs of major changes assoon as possible.
In this context, efforts at global risk assessment and analysis have come to be
seen around the world in recent years. In Japan’s case, the increasingly harshstrategic environment that our country faces makes it particularly essential toconduct global risk analysis that can contribute directly to decisions about theappropriate actions to take.
Here at PHP Sōken we have responded to this need with the launch in 2012 ofour Global Risk Analysis Project. This project brings together experts from a varietyof fields to identify the key global risks that Japan faces in the coming year, focusing
on their potential impact in four areas: (1) the Japanese economy, (2) Japan’s peace
and its people’s security, (3) Japan’s international standing, and (4) the activities ofJapanese businesses. Project members deliberate intensively on these topics andreport their conclusions in the annual “PHP Global Risk Analysis” report. The 2018
edition is the seventh in this series. (The full text of this report is available inJapanese at https://thinktank.php.co.jp/policy/4308/.)
The reports have won a wide readership from people in the business world,government, and the media in Japan. And many enthusiastic readers have suggested
that we should share the contents with people in other countries so that they can see
how global risks are viewed from Japan’s perspective. In response, we haveprepared this English-language summary of our latest report. The report in Japanesestarts with an introductory “Global Overview” that presents the global context for
the risks. The main body of the report consists of sections about 10 broad risks. Eachsection offers analysis of the risk in question, along with an assessment of its
potential impact on Japan and its implications for Japan’s policy. In this English
summary we present a full translation of the Global Overview and translations ofjust the main points in the sections about each of the risks. (Please note that the risks
are not in order of their ranking by importance. We have arranged them in an orderthat we hope will make it easier for readers to see the interconnectedness among
them and understand the overall risk structure of the world.)
We earnestly hope that this English summary will give readers usefulperspectives meeting their interests.
January 2018
Global Risk Analysis Project, PHP Institute, Inc.

Global Overview
Global Risk Analysis Project, PHP Institute, Inc.
Arrival of a post-globalization world The vision of a post–Cold War world where democracy and the market economy
would expand on a global scale and become universal is losing its persuasiveness.
The “end of history” has ended.
 We see a shift from a world where globalization was seen as a panacea, where
all would be well as long as the free movement of people, goods, money, andinformation were promoted, to a “post-globalization” world where selfcentered nationalism and protectionism are coming to the fore.
 Against the backdrop of globalization and technological innovation, twocontrasting trends are in progress: the “great convergence” described by Richard
Baldwin, namely, the narrowing of the gaps between advanced and less advanced
countries around the world, and the “great divergence” seen within countries as
the income and wealth gaps among citizens grow wider.
 The “great convergence” is bringing about a power shift, while the “greatdivergence,” particularly within the advanced countries, is fomenting anti-freetrade sentiment, opposition to immigration, and other types of populism. The
confluence of these two trends is now challenging the liberal international
order led by the advanced countries.
 As political and economic problems continue to plague the major liberal
democracies, their soft power is on the wane.
 Major countries will increasingly seek to build their own spheres of influence.
 While the Trump administration seeks to restore America’s strength with amilitary buildup, in its trade policy it favors bilateral agreements and is cool to
the formation of regional architecture. China, with Xi Jinping firmly in charge,
is using its financial clout to extend its sphere of influence beyond Asia. In East
Asia two hierarchical orders intersect, one centering on the United States andthe other centering on China.
 Former imperial powers other than China, such as Russia, Turkey, and Iran,seek to create their own spheres of influence on a regional level.
 Should a great power vacuum occur in a geostrategically critical location, suchas North Korea, the major powers involved will undertake a fierce struggle tobring the area in question into their sphere.
 With the major democracies reluctant to apply military force, it has become easier
for a country like Russia, unconcerned about the international reaction to its useof force, to take the initiative.

The stronger impact of domestic politics on international affairs
 With the rise of populism opposed to the conventional wisdom concerninginternational political and economic relations, domestic politics is coming to havea stronger impact on the shape of diplomatic, security, and trade policies.
 There are worries that the Trump administration, looking toward this year’s
midterm congressional elections, might launch an all-out trade war.
 Major countries around the world, including Russia, China, the United States,Turkey, and India, are now led by strongmen. Since the decisions made by theleader carry more weight, the course of foreign policy is less predictable.
 Drives by ethnic minorities like the Kurds and Catalans to achieve sovereign
status for their regions are being aggravated by overreaction from central
governments and the involvement of surrounding countries.
 The impact of Brexit will extend to Northern Ireland and Scotland.
 In Japan, the 2018 elections for governor of Okinawa and mayor of Nago may
bring the issue of the US bases in Okinawa to the forefront again.
 Authoritarian states have been meddling in the internal political and social affairsof democracies, exploiting the openness of democratic systems by hacking andspreading misinformation during election campaigns, selectively providing funds
to the media and think tanks, and developing contacts with sympathetic politicalparties and politicians and offering them support. The exercise of this sort of“sharp power” (a term coined by the US National Endowment for Democracy), is
becoming a normal phenomenon.
Concerns over a lack of ability to cope with the next major financial crisis
 On the surface the advanced economies appear to be performing well, butgovernment debts are continuing to grow as a byproduct of countries’ efforts tocounter the effects of the 2008 global financial crisis while also trying to keep
growth from lagging.
 The major countries now have little fiscal or monetary policy leeway, and it isquestionable whether the world will be able to deal with the next similar majorcrisis.
 Given the Trump administration’s cool view of international cooperation, thenext crisis may weaken America’s dominance over the international financialsystem.
 There is a danger that some major geopolitical event, such as a limited US militarystrike against North Korea, could generate a financial and economic shock.
Emerging technologies working to overturn existing industrial rankings
 With the rise of artificial intelligence, robotics, “big data,” self-driving vehicles,
and other emerging technologies, the conventional theory of industrial
development is being superseded.
 Particularly in fields like AI, digitization, and big data, where it is easy fordisruptive innovations to occur, we see the phenomenon of emerging countries
leapfrogging over advanced countries, skipping the intermediate stages andjumping directly into leading positions.

 Japan and other advanced countries may suddenly lose their superiority infields where they have traditionally excelled.
 The dominance of a handful of IT companies and their entry into other fields
benefit consumers by causing prices to fall, but in many countries they also
lead to the loss of jobs and declines in tax revenues. Such developments further
exacerbate social strains.
 China is making maximum use of big data to control its economy and society—a system that Sebastian Heilmann has dubbed “digital Leninism.” Rivals will be competing intensively to form the rules for the new fields ofindustry arising from emerging technologies, such as electric vehicles and selfdriving vehicles.
 Once early leaders impose rules favorable to themselves, it will be difficult forlatecomers to catch up with them.
 The spread of EVs will increase demand for cobalt, while the decline of dieselpowered vehicles will decrease demand for platinum. New trends like these inindustrial markets will lead to major changes in the prices of natural resources
and in the strategic importance of resource-rich nations.
 As the ability to generate the surpluses that serve as the basis for externalinvolvement moves from today’s advanced countries to the emerging economies,
the power shift will accelerate further.
 The rise of FinTech will trigger a phase transition in finance.
 The availability of new options for the provision of extending credit can be
expected to promote dramatic business expansion, but the use of AI fundmanagement tools and the spread of robot advisors could lead to a dangerous
increase in volatility.
 The entry of diverse players seeking to win in next-generation finance is boundto make the FinTech boom overheat, but those involved are rather a mixed bag.
The survival of the fittest amid fierce competition will result in a major
realignment of the players in the financial sector.
 Bitcoin and other virtual currencies may come to challenge the authority of thestate as the issuer of currency, and they could turn into hotbeds of money
laundering and black-market operations. On the other hand, as they are easierto capture than cash, they could strengthen states’ ability to collect taxes,
enhance the effectiveness of ultra-low-interest policies, and improve thetransparency of financial transactions.

PHP Global Risk Analysis Project

Global Risks 2018
1. United States: Meltdown of the liberal international order due to Trump’s“supporters first” stanceAn America-first foreign policy consistently aimed at appealing to supporters
A US political scene clouded by polarization and a stream of scandals
Shakiness in America’s soft power and ability to lead the international order

2. China: Full-fledged drive to create a Chinese-led international order
Xi Jinping administration aiming to build up a record of diplomatic achievements
China’s growing international clout
Threat from China to the existing liberal international order

3. Russia: Multipolar offensive posture coming into clear view around the world
Long-term campaign aiming for the end of America’s superpower status and theformation of a multipolar international orderTotally uncompromising position on Ukraine and NATO
Quest to take the lead in the Syrian peace process
Active involvement in efforts toward a breakthrough in dealing with the North Korean
nuclear and missile development issues

4. North Korea: Effectively join the nuclear club based on four-party talks among
the United States, North Korea, China, and Russia
Freezing of the status quo under a four-party framework (United States, North Korea,China, and Russia) in response to the paradoxical strategic structure of stability
balanced against mutual distrust on the Korean Peninsula
String of misunderstandings leading to the outbreak of a second Korean war
Crisis from a breakup of the US–South Korea alliance US–South Korea alliance in criticaldanger of breaking up

5. Middle East: Realignment of the regional order triggered by an assertive Saudi
ArabiaRisk of unrest within Saudi Arabia and of a military clash involving IranAcceleration of Turkey’s move away from the West and a shift in the Middle Eastern
power game

6. Europe: A wave of moves toward the splitting of the EU spreading from Britain tothe continent
Disarray within Britain over the remaining prospect of a “hard Brexit”
Widening of the rift in the EU between those favoring and opposing deeper integration
Loss of the EU’s ability to serve as a global leader due to internal splits

7. The Americas: Extension of China’s “Belt and Road” initiative to Latin America inresponse to a US retreat from engagement in the regionA sharp decline in US engagement in Latin America on three fronts: politics andsecurity, economic integration, and development assistanceLack of progress in renegotiating NAFTA, posing a major political and economic risk
for North America
Rapid moves by China to fill the vacuum left by the United States by promoting its “Beltand Road” initiative

8. Cyber security: Inability of industry to adapt their cyber defense capabilities fastenough to keep up with the rising threat of cyber attacks
Increased vulnerability in the energy sector, where deregulation is progressing, and inthe manufacturing sector, where technological innovation is required
Lack of progress in supply-chain risk management due to its difficulty and high cost
Rising difficulty of detection as state-sponsored attacks become common

9. Terrorism: Threat of new types of attacks based on planning by dispersed IS
operatives and use of drones
Increased danger from dispersed IS operatives forming hubs and from remote-control
attacks
Aggravated risk of new types of terrorism using drones and other advanced
technologies

10. Auto industry: A shift to electric vehicles leading to a redrawing of the auto
industry map
Heating up of international competition in making the rules for EVs
Impact on capital investment plans of auto parts makers from expectations of a shortterm surge of business due to the “EV shift”
Decline in auto sales as the car-sharing business gets into swinProject Members
Masafumi Iida
Senior Research Fellow
National Institute for Defense Studies
Satoshi Ikeuchi
Associate Professor
University of Tokyo
Masafumi Kaneko
Director/Senior Research Fellow
PHP Institute, Inc.
Haruyoshi Mabuchi, CFA
President
Bouquet de Fleurettes
Seiya Nakajima
Chief Economist
Office of Niwa
Toshio NawaExecutive Director / Senior Security Analyst
Cyber Defense Institute, Inc.
Noriaki Oba
Energy Analyst
Izuru Sugawara
Analyst of International Politics
Koichi Tajima
Division Manager
Research Division, Japan Credit Rating Agency, Ltd.
Toshiyuki Yasui, Ph.D.
Guest Professor
Graduate School of System Design and Management, Keio University