In a series of short comments, the professionals at Pacific Tax Partners are going to discuss currency exchange rates and their effects.

Forex Perils: A Warning from Japan

This is the first in a series of short comments in which the professionals at Pacific Tax Partners discuss currency exchange rates and their effects.

For many months Japanese exporters have bewailed the strong yen; industry leaders made headlines with their pleading to the government, and there was the unprecedented statement by the prime minister that the yen had become too strong. The damage has been so great that reportage of favorable effects, such as the lower cost of imported petroleum, rarely appears in the media.

To start, on 15 January Tokyo Shoko Research, the company that is also Dun & Bradstreet's Japanese representative, reported corporate bankruptcies directly caused by the forex market increased 3.4-fold in 2010 to 75 companies. 26 of these bankruptcies were caused by use of currency derivatives that turned out to have been based on wrong decisions.

The TSR report is a good reminder even if you get cost control, marketing and sales right and earn a profit, it can be easily wiped out by the unmerciful movement of the currency market.

Companies can hedge against forex risk by several methods. Japanese companies that pay for imports in dollars may have dollar income they can use. Companies can try to make export contracts call for payment in yen. The most common method is the use of forward contracts.

More than half of the companies that failed were wholesalers and most of the rest were manufacturers.

In December alone there were 12 currency-caused failures.

The lesson at the personal level: If you have yen-dollar transactions or exposure at a substantial level, who advises you on the outlook for the exchange rate?

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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