Economic Impact of Tsunami in Japan

Potential impacts of the Japan disaster on the global and domestic economy

The recent tragic earthquake and subsequent tsunami has caused a significant disruption to the Japanese economy. The true cost of a disaster of this magnitude is weighed first and foremost in the human suffering that follows in the wake of events such as these. Sympathies go out to those whose lives have been overturned by this tragedy. While it is too early to assess the full economic impact of these events, we felt it would be helpful to outline some of the possible economic implications for Canada and the world.

According to industry experts here are some key points on global events:

Effects on the Japanese economy

  • Prior to the earthquake, the Japanese economy was gathering momentum on the back of strong overseas demand from Asia and the U.S. As long as global demand continues, the Japanese economy will likely recover quickly.
  • In the short term, the crisis in Japan will depress economic activity in the country, but in the long run it will likely be stimulative. It’s expected that the Japanese economy will grow faster than otherwise expected, as the country rebuilds.
  • After the Kobe region earthquake in 1995, Japanese industrial production fell during the month of the earthquake but had fully recovered to pre-earthquake levels just a few months later. While there are differences between the Kobe disaster and the current incident, the general historical pattern of sudden decline followed by a reconstruction-led recovery holds across many examples of natural disasters in developed economies.

Global impact

  • The political instability in the Middle East and North Africa has caused an increase in oil prices. However, Japan is one of the world’s largest importers of crude oil. The recent disaster has resulted in a decrease in Japan’s demand for crude imports, as a consequence oil prices have retreated from recent highs.
  • Lost output in Japan and disruption to industrial production will have a negative near-term impact on the global economy. But as Japan was not considered to be a major driver of the current expec­tations for a solid year of global growth in 2011, a temporary decline in Japanese output would likely not be a show stopper for global economic expansion.
  • If the damaged nuclear power plants in Japan remain offline, the country will have to make up the lost electrical output with fossil fuels, such as coal and natural gas. The reconstruction of Japanese infrastructure would likely result in more commodity-intensive activity than expected, which ultimately could increase demand for crude oil and other natural resources.

Effect on Canada

  • While Japan is a major Canadian trading partner, they are not large contributors to the Canadian economy so the domestic impact is likely to be negligible.
  • Coal, agricultural products and other commodities are leading exports to Japan, and could see increased demand in the short term (e.g., coal may benefit if nuclear energy is slow to come back on line) and in the medium to long term (e.g., forestry products, as the country rebuilds).
  • Canadian imports could be curtailed in certain sectors. Auto and auto-related parts are a leading import from Japan and this is a sector located in the disaster area. This could hinder auto production in Canada at Japanese company plants and lead to reduced inventories on dealer lots. However, auto sales in Canada should not be greatly affected, as non-Japanese auto manufacturers could meet demand.

Tax Tip

The Canada Revenue Agency’s Tax-Free Savings Account tips: What you need to know

The Tax-Free Savings Account (TFSA) is an important investment vehicle that can be used for many different savings objectives over an individual’s lifetime. Since the introduction of the TFSA in January 2009, over 4.8 million Canadians have opened one or more TFSAs. To get a TFSA working for you, here are a few key points to remember:

A TFSA can be made up of an array of investments. Your TFSA can contain different types of investments, similar to those in a Registered Retirement Savings Plan, such as Guaranteed Investment Certificates (GICs), bonds, mutual funds and stocks. Contact your financial institution for more information concerning eligible investments.

TFSA contribution room accumulates every year. The maximum TFSA contribution room for an individual was $5,000 for 2009. For 2010 and 2011, your available TFSA contribution room is made up of three components:

  • Your annual TFSA dollar limit of $5,000,
  • Your unused TFSA contribution room from the previous year, and
  • The total amount of withdrawals from your TFSA made in the previous year.

Example 1

If you contributed $5,000 in 2009 and only $2,000 in 2010, then you could contribute $8,000 in 2011. This amount includes the $3,000 unused contribution room from 2010 plus $5,000 for 2011.

Example 2

If you contributed $5,000 in both 2009 and 2010 and then withdrew $10,000 in November 2010, your contribution room for 2011 would be $15,000. This is calculated using your annual dollar limit of $5,000 for 2011 plus the $10,000 withdrawal made in 2010. Withdrawals are not added back to your contribution room until after the end of the year.

It is important to note that while you can open more than one TFSA, your total contributions in a year cannot exceed your available TFSA contribution room.

Income earned in a TFSA. Income such as interest, capital gains and dividends accumulates tax-free in your TFSA and withdrawals made from your TFSA are not taxed. Except for certain transfers, any withdrawals from your TFSA, including the income earned, will be used in the calculation of your TFSA contribution room for the following year.

Transfer your TFSA directly from one financial institution to another. If you have more than one TFSA, you can transfer funds directly from one of your TFSAs to another of your TFSAs without affecting your contribution room. The direct transfer must be completed by your financial institutions. If you withdraw funds on your own from one TFSA and contribute those same funds to another TFSA, the re-contribution will be considered to be a new contribution. As a result, your TFSA contribution room will be affected and you may be subject to a tax on excess contributions.

TFSAs are different from regular savings accounts. It is possible to make multiple contributions and withdrawals throughout the year to your TFSA like you would with a regular savings account. However, your total contributions in a year cannot exceed your available TFSA contribution room for the year or you would be subject to a tax on excess contributions. This tax is based on the total contributions made to your TFSA in a year and not on the account balance at the end of the year.

If you deposit more than your contribution room you will be subject to tax. If, at any time, your contributions in a year exceed your TFSA contribution room for the year, you will be subject to the TFSA tax on excess contributions. You are liable to a 1% tax per month on your highest excess TFSA amount in each month. This tax will accumulate until the excess amount is withdrawn. If you have excess contributions you should withdraw the funds immediately to avoid any additional tax.

Find out today how a TFSA can work for you. Take the time to familiarize yourself with the rules. If you have questions, contact your financial institution or the CRA at 1-800-959-8281 or visit our Web site at: