This is the third 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, 2011 and Beyond

The humanitarian and the natural sciences aspects of the Tohoku Pacific Earthquake and its effects are indeed overwhelming, but for a moment going beyond that, some thoughts about the future:

  1. The triple combo of the earthquake, tsunami, and nuclear power plant problems have delayed the musical chairs ritual of “Change the Prime Minister,” leaving Naoto Kan in that position, for better or for worse, in sickness or in health. At the same time, political party reorganization and restructuring has had to be postponed. Public administration is being strongly influenced by the events (local elections are being delayed, for example), but the prospects of continued political instability and absence of reliable leadership are more important. When perception of this is combined with a serious reassessment of Japan’s economic outlook, it will have far-reaching effects — tending to favor a weaker yen over the long-term. As we have previously predicted for the short-term despite market intervention, Yen will continue to rise and remain historically strong, as currency reserves will be repatriated for capital projects.

  2. The corporate sector has become destabilized and this will last at least until September and perhaps, uncomfortably, beyond that. Supply chain vulnerability, market access, electric power supply and its reliability, prospects of a major hit to agricultural and maritime food industries, demand distortion for products including building materials and construction equipment, possibility of delays in export business (there were confirmed reports of checking Eurozone imports from Japan for radioactivity, for example), movement of employees, quake and tsunami caused loss or damage to facilities... all this and more will require changes in business plans and behavior.

  3. This is an epoch-making event in social terms. Strengthening awareness of being Japanese may lead to a revival of “nipponjinron” discourse — discussion on the nature of being Japanese. Many fundamental ideas and social systems will undergo review. Changes in attitudes and behavior are certain. Among these changes, much more importance will be assigned to security; this will arise from events such as loss of life when there was destruction of homes for elderly people.

  4. US efforts to assist will make defense related adjustments concerning military bases easier to accomplish, and US-Japan relations are likely to become stronger.

  5. The indebtedness of the nation will increase. The cost of insuring Japanese government bonds will rise, and Japan’s financial status will deteriorate over the short-term. The prospect of a massive rebuilding effort will evoke expectations of a more vibrant economy, but paying for the infrastructure will add to the debt nightmare woes of the nation. New methods of financing including a new type of bond issue to mobilize household savings, joint public-private sector initiatives, and the like will be needed.

  6. Energy issues will be a national albatross. Like the Japanese population, nuclear facilities have aged, but in the latter case this means that they have become relatively outdated in terms of technology. Some plants will never be re-started; inspections and possible remedial measures for others will reduce supply capacity. Energy issues will underline much of the short-, medium-, and long-term thinking and planning.

We look forward to being part of Japan's recovery and renaissance.

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

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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