The IRS has designated the Japanese earthquake and tsunami as a disaster for federal tax purposes.
Employers with employees in Japan may provide tax-free disaster relief, including reimbursements or payments for reasonable and necessary personal, family, living, or funeral expenses not otherwise covered by insurance; and reasonable and necessary expenses to repair homes, or to repair or replace personal belongings.
Employer-sponsored private foundations may make disaster relief payments to employees without affecting their tax-exempt status.
Warning: Paying lost wages to employees remains fully taxable. (Notice 2011-32, IRB 2011-18)