(Reuters) – Shaken by the prospect of nuclear meltdown after a devastating earthquake and tsunami, Japanese investors will dump overseas assets on Monday and bring their money home to help finance reconstruction.
Positioning for this could send the dollar plummeting versus the yen on Monday and lead to a sharp slide in Treasuries since U.S. government bonds are a favorite asset of Japanese investors, market analysts said.
Stocks also are likely to come under pressure.
Japanese insurers will probably sell some of their most liquid foreign assets such as U.S. Treasuries so they can respond to the worst disaster since World War Two.
The crisis could lead to insured losses of nearly $35 billion, risk modeling company AIR Worldwide said, making it one of the most expensive disasters in history and nearly as much as the entire worldwide catastrophe loss for the global insurance industry.
Traders braced for just such an outcome on Friday, when the yen surged and Treasuries fell. The Bank of Japan probably will add money to the system to limit the liquidation of assets. But the big question remains of how much follow-through selling is yet to come.
Dan Fuss, the vice chairman of $150 billion Loomis Sayles, told Reuters on Sunday that his best guess is that Treasuries will continue to see losses.
Because Japan is the second-biggest holder of U.S. government debt and they have nearly $900 billion in dollar reserves, Fuss said Japan will likely use reserves for rebuilding.
“A big buyer of bonds is taken out of the market,” Fuss said, adding that Japan “will be less able to add to their reserves and less able to buy Treasuries.”
Japan’s crisis may also provide a new reason to press on with the long-awaited retreat in stocks.
A lot will depend on the price of oil, which fell on Friday on concern that the Japanese earthquake would hit global economic sentiment. It came off recent highs reached on the revolts in North Africa and the Middle East, but upheaval in the region over the weekend continued — notably with a protest in Saudi Arabia.
Investors will also engage in the grim exercise of determining which companies will benefit from helping the world’s third largest economy rebuild.
“You could expect to see industrial infrastructure companies do better. As for the overall markets, I don’t see it having any long-term negative impact,” said Paul Hickey, co-founder of Bespoke Investment Group.
“I remember after the last big tsunami in Indonesia there was a widespread view that it would be devastating, but there were no big impacts. Granted this is a much more developed region and certain insurance companies will have bigger exposure than others but outside of that region business will continue to go on.”
By Burton Frierson
NEW YORK | Sun Mar 13, 2011 4:38pm EDT