We at Pacific Tax Partners continue to closely observe situation in Japan and how the recent tragedy affects the economy.

Ripple Effects

The triple disaster in Japan has started to have widespread secondary effects. Here are some.

  1. Psychological effects, social effects and costs: All Japanese, even if not directly struck by the earthquake's physical effects, are suffering emotional stress and economic damage.

  2. Electricity: The Kanto/Tokyo region power shortage should not be taken lightly. In spite of all the cuts made thus far (including the blackout of iconic Tokyo Tower), rolling blackouts are still necessary now, at a near-minimum time of electric consumption. No one has any idea how Tokyo will get through the summer peak season, though the government promises a plan by late April.

  3. Employment: In addition to the destruction of places of work and businesses, the many breaks in supply chains and prospects for unstable and reduced power supply means jobs for manual laborers, operators of construction equipment, and construction workers, but less work for people in manufacturing and services (logistics). The need for power conservation has kept movie theatres closed or perhaps open shorter hours. Restaurants and bars that stay open have fewer customers as many people (in Tokyo and environs, in particular) go home from work early now. Banquets are being cancelled. Especially take note of the high percentage of workers today who are contract employees and, hence, will suffer more than others. Overtime in many sectors will be down.

  4. Consumer prices: Core inflation will rise, although not in a way desirable from the viewpoint of combating deflationary forces. Agricultural and marine food products from the hard-hit prefectures are down and will be down for these reasons: loss of life and homes of producers and disruption of social activity; evacuation; destruction of farms, equipment, structures, harbor facilities, fishing vessels; loss of storage and distribution facilities, and vehicles as well as damage to highways, roads, and bridges; fear or real danger of radioactive contamination of crops, fish, and soil. Nikkei Ryutsu newspaper reports that Ibaraki Prefecture produces 18% of Japan’s mackerel, 25% of bell peppers (also imported from New Zealand), 25% of Chinese cabbage and 16% of lettuce. 20% of Japan’s peaches come from Fukushima. Miyagi produces 23% of the country’s oysters. 44% of wakame seaweed is from Iwate. These are examples.

  5. International trade: Several countries have moved to curtail imports of Japanese food, while China has begun to produce and pack more food for export to Japan. Other countries may do the same. If a high level of radioactivity is detected in the sea near major Japanese ports, vessels carrying imports, including food, will not be permitted to offload there (increasing costs if distant ports have to be used). Coastal and export–carrying vessels also may be subjected to limitations. Inspection of exports from Japan will slow and perhaps limit imports. All of this is in addition to the immediate loss of production that would otherwise be made at destroyed or damaged plants, plants that cannot operate because of insufficient power supply, and, in particular, production and business lost because of supply chain problems.

  6. Disrupted supply chains: Say that a maker of high-tech film for smartphones has to close a factory. The fabricator of handsets using that film shuts down once inventory is used up... and cancels orders for other parts as well. Affected companies include many outside of Japan. Supply patterns will change over the short-term, and perhaps part of the change will last longer.

  7. Commerce effects: Consumer sentiment is down and may not easily recover, even if shops are well stocked, entertainment facilities reopen, and the lights go on again. The composition of household consumption spending will necessarily change, benefiting some companies and detracting from others.

  8. International political fallout: Japan's nuclear crisis contributed to or likely caused German Chancellor Angela Merkel's coalition to lose three local elections, threatening its continuity. Further ripple effects within Europe probable.

There are other effects, including energy policy and energy resources producer issues (favorable and unfavorable) but we stop here for the moment. The number of issues created by the disaster is increasing daily; they include the question of the future of Tokyo Electric Power Company (TEPCO), TEPCO’s basic charge to users, mortgage payments on destroyed houses, and many more. Several months ago TEPCO management was bullishly talking about new investments in China and India: we can assume that's over. TEPCO’s investment in a new Nuclear plant in Texas is now "in doubt" threatening its construction financially. TEPCO bonds are now rated the lowest junk. Given the myriad aspects of the triple disaster tragedies, no wonder that Japan has pushed so many other matters off the pages of our daily newspapers and off of our TV screens.

Photo credit: Chikako Yoshida
The Tohoku Pacific Earthquake and disasters that followed it will lead to many business changes and, once things have stabilized, new opportunities in Japan.

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.

Access our previous comment on “Japan, 2011 and Beyond” at: http://www.pacifictaxpartners.com/analytics/2011-03-20-post-quake-4.html

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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