POINT OF VIEW/ Tomohisa Sashida: Contingency plans only hope in a major disaster

The Jan. 12 earthquake that devastated Haiti drove home the fact that national capitals are not immune to disasters of catastrophic magnitude.

Some people may argue that since Haiti is a developing nation, there is little that a developed country like Japan can learn from it. But that is not true. World history offers some pointers.

The Portuguese capital of Lisbon was struck by a tremendous earthquake in 1755. The temblor had an estimated magnitude of 8.5. It is said to have killed one-quarter to one-third of the city's 270,000-strong population.

Back then, Portugal was a key global trading power that had made inroads into South America, Africa and even East Asia. However, its influence diminished after the earthquake and it eventually ended up as a small European power.

The 1923 Great Kanto Earthquake that destroyed much of Tokyo also offers a valuable lesson. It sent the economy into a tailspin. Fortunately, the economic strengths of Osaka and Nagoya could be counted on back then to help get the nation back on its feet. Today, the economy is much more centered around business activity in Tokyo.

Experts estimate there is a 70-percent chance that Tokyo will be hit by an epicentral earthquake within 30 years. If Tokyo suffered a direct hit, would Japan be able to maintain its position as a major economic power? Would it be able to overcome the inevitable short-term plunge in economic activity and recover to its previous level? We need to seriously think about what could happen and make preparations for such a crisis now.

Roles of companies

Individual companies can play a major role in disaster preparedness. Under the existing disaster countermeasures basic law, the central and local governments as well as individual citizens are supposed to take the initiative in disaster prevention and reconstruction. The law was enacted in response to the 1959 Isewan Typhoon, which caused major damage in the Ise Bay area, including Nagoya. At the time, Japan's economy was still largely dependent on agriculture and fishing. In that regard, the law, which was aimed at protecting people's lives and assets, may have been adequate.

Since then, the nation's economic structure has undergone drastic change. Eighty percent of the population is now made up of corporate employees and their families. As such, companies have been thrust into a more significant role in society.

Companies need to make plans to ensure they can continue to operate even if the domestic economy takes a major hit from an earthquake. In short, companies must take action because politics and the administration alone cannot keep the ball rolling.

There are many matters that need to be addressed. For starters, preparing a business continuity plan (BCP) is important. In the event of a natural disaster, how can companies stay in business, continue to supply products and services and maintain the chain of command if their head offices and factories are destroyed? Do they have plans to secure substitute offices, production lines and employee housing? Disaster relief plans that look good on paper alone will not work. Companies need to draw up realistic plans, stage drills and figure out whether their preparedness strategies will function.

The government has released a series of guidelines, calling for the formulation of BCPs at all major companies and about half of all midsize businesses. But there is a long way to go before the target can be met as only about 20 percent of major companies have such plans in place at present.

This is partly due to the fact that many companies know little about BCPs. They have the mistaken notion that disaster control and relief are the job of general affairs divisions and all they need to do is to confirm that employees are safe and stockpiles are in place. Such stereotypical thinking will not work.

Compiling a BCP is a process of deciding in advance on the appropriate strategies to deal with an emergency. They must select products on which they can concentrate all their available resources. That way, companies will be able to continue to supply essential products or services. Some companies may put priority on meeting their social responsibilities while others may choose to take steps to secure profits for survival.

Those are decisions best left to the initiative of top managers.

If corporate activity dies, the nation's economy cannot be sustained.

For humans to survive, water, food and shelter must be secured before anything else. But in the case of businesses, funding is essential. A cash flow is indispensable for any company to stay in business. Without it, a company will go under. After a natural disaster, even if facilities at companies are not seriously damaged, operations would be expected to slow down, thereby pushing down earnings. How long can a business stay afloat in such a situation? Many companies faced such problems after the 1995 Great Hanshin Earthquake and the 2004 Niigata Chuetsu Earthquake.

Funding restoration efforts

If an epicentral earthquake strikes Tokyo, countless similar cases will inevitably arise.

No company can stay in business without help.

Businesses are dependent on other companies, including suppliers of raw materials and parts, providers of services that transport products and those that buy them. Companies that form a supply chain should get together and consider how to stay operational as an entity following a disaster.

If Tokyo was destroyed by an earthquake, the government would encounter a number of difficulties. For example, the sharp decline in corporate incomes would result in drastically lower tax revenues. If companies went belly up one after the other, their employees would find themselves adrift, adding to the government's burden of paying unemployment benefits to them.

The government would have to secure funds to finance efforts to clean up the damage. The government expects economic losses of 112 trillion yen ($1.24 trillion), including restoration costs and decline in industrial production. What would happen if a major disaster struck the capital and caused damage that exceeded the national budget when the outstanding debt owed by the government is about to reach 900 trillion yen? These questions must be addressed to avoid a disaster within a disaster.

The important thing is that companies as well as the central and local governments should compile continuity plans so that the nation as a whole can better cope in the aftermath of a disaster. Otherwise, if a powerful quake were to occur directly beneath the capital, there is no guarantee that Japan would not follow the same fate as 18th-century Portugal.

The world has never seen a sudden fall of such a giant economic power as present-day Japan. If that happens, how can Japan recover its strength to current levels and keep its economy on track?

Since we entered the 20th century, no advanced country has seen its capital or center of economy devastated by a catastrophic disaster.

Japan may become the first such case. But it has yet to draw up concrete measures and action plans to meet such scenarios. Both the business and political circles must seriously tackle this problem.

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Tomohisa Sashida is chief consultant with Tokio Marine & Nichido Risk Consulting Co.