This is the first in a series of short comments in which the professionals at Pacific Tax Partners discuss impact of the recent tragedy in Japan on the economy.

Japan’s Post-Quake/Tsunami Disaster Economy (#1)

As of this writing (Saturday afternoon, East Coast time) quake tremors have not stopped.

Estimates of the cost of destruction and recovery will start appearing early in the week and will be revised over time. These will include downward revisions of economic forecasts.

Government plans have not yet been announced but there will be massive welfare needs. Banks are providing up to ¥100,000 (US $1,200) on ID alone for people without bankbooks or bankcards.

Homes lost not yet mentioned on TV but will be counted in units of 10,000. Preparations have begun for temporary housing; thousands will have to relocate or tolerate such housing for years. (Much temporary housing in Kobe remains in use from the 1995 Hanshin Jiishin quake there.)

Entire communities have been destroyed; social costs are incomprehensible. Expect no looting... there is nothing left to take.

When the Tokyo stock market reopens, insurance companies will lose market value so quickly that stop-loss circuit breakers will stop trading. Construction companies and cement stocks will rise. Overall, the market will decline sharply, destroying asset (and collateral) value.

Reconstruction will be beyond national capacity; Japan will have to invite foreign contractors to help; this will mean Korean and Chinese contractor and subcontractors will be mobilized, with equipment first to clean up and, then, rebuild infrastructure. Some materials may be recovered for recycling (particularly metals) but temporary storage, transportation, and domestic capacity will be problems; exportation may be possible at least to an extent. Many buildings in “safe” areas that are still standing may not be safe.

Yen will continue to rise, as currency reserves will be repatriated for capital projects.

Costs to the national government will require a supplementary budget and even if some cuts are made in other areas of fiscal disbursement, the already serious issue of the scale of the national debt will be made more serious. Elegant solutions to this challenge – and the will and daring to execute them – are desperately needed.

Time out for political disputes.

For more information on customized economic reports and tailored US-Japan tax advice that cuts to the chase, contact the staff economist and experienced tax professionals at Pacific Tax Partners:

Terry Wilson US Income Tax, IRS Tax Appeals Terry Wilson has 25 years expertise in international financial planning and trade issues as well as US income tax and tax appeals. He is qualified as an MBA and US CPA, Certified Financial Planner, Certified Internal Auditor, Certified Fraud Examiner, and is a Certified Computing Professional. He is a member of the American Institute of Certified Public Accountants (AICPA), the Finance Club of Brussels at the Bourse, and the Institute of Internal Auditors. He can be reached at [email protected].

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