Financial leaders of the world's richest countries will hold talks on Friday on ways to calm global markets roiled by Japan's nuclear plant crisis and concern it will unravel the world economy's fragile recovery.
Rising alarm over the unfolding disaster in Japan following an earthquake and tsunami has sent shivers through world markets, hitting shares and other riskier assets, such as commodities, while prompting investors to scurry for the safety of government debt.
The yen soared in disorderly trading to a record high against the dollar on speculation Japan will repatriate billions of dollars in overseas funds to pay for massive reconstruction that is expected to be much costlier than the bill following the Kobe earthquake in 1995.
I think the world economy is going to go right down and it has happened at a time when financial markets are still fragile, said a central banker of a Group of Seven country.
The comments, made on condition of anonymity, are a testimony to the degree of concern among top policymakers about the potential impact of Japan's triple disaster and in particular its race against time to prevent a nuclear meltdown.
The G7 financial ministers and central bankers will hold a telephone conference call around 2200 GMT on Thursday (7 am Tokyo time Friday), Japan's finance minister, Yoshihiko Noda, said as financial markets braced for potential currency intervention following the yen's surge.
I don't think stock and currency markets are in a state of turmoil, Japan's economy minister, Kaoru Yosano, said in an interview with Reuters.
We would like to get psychological support from the G7, he said.
The triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.
Makers of equipment for mobile telephones to carmakers and chipmakers have warned of a squeeze on their businesses given Japan's crucial role in many supply chains that keep global commerce ticking over.
The technology sector felt an immediate impact after Friday's quake and tsunami since Japan makes around a fifth of the world's semiconductors.
NAND flash memory chips, used in various electronic gadgets, soared 20 percent on Monday.
On Thursday, electronic conglomerate Toshiba Corp said an assembly line that makes LCD displays for smartphones and other devices will be shut for a month to repair machinery damaged by the quake.
The company's shares are already reeling on speculation its nuclear power business will suffer after governments globally have raised doubts about the industry's future.
China suspended approvals for new nuclear plants on Wednesday, effectively putting on hold the world's most ambitious expansion plan.
Economists fear an extended slump for the world's third-biggest economy with a recession possibly lasting two or three quarters. Billions of dollars have already been wiped off the stock market, a surging yen is threatening the economy's key exports industry and an electricity gap that could last months.
The economy bounced back quickly after the Kobe earthquake. Industrial output fell for one month but the overall economy continued to expand.
The economic cost of the disaster will be large, economists at JP Morgan said. There has been substantial loss of economic resources and economic activity will be impeded by infrastructural damages in the weeks and months ahead.
The effect on global economic growth may be more limited. BNP Paribas estimates the disaster will shave 3 percent from Japan's projected GDP this year, Paul Mortimer-Lee, head of market economics, said. That would account for just 0.2 percent of world output.
YEN POWERS TO RECORD HIGH
A big concern for G7 financial leaders will be the potential for a surge in yen repatriation to Japan to unsettle global markets.
In addition, many investors borrow in yen to fund investments in other currencies, so may be vulnerable if their positions are squeezed. That also would push the yen higher.
If there is a requirement for Japan to start to repatriate, I think an important role that authorities might play is to make sure that financial markets are stable, said Robert Rennie, chief currency strategist at Westpac Institutional Bank in Sydney.
And if that involves the authorities helping to smooth financial markets, under the circumstances I think that is very understandable, he said.
What also worries policymakers is that Japan's disaster has come at a vulnerable time for the global economy and financial market confidence following the global financial crisis.
The G7 talks will address the impact of the crisis on economic growth, energy output, the supply chain and financial markets, a French government source said on Wednesday.
Japan's central bank has pumped billions of dollars in cash into its banking system to help stabilize jittery markets and government leaders have called for calm.
Instead, market moves exposed an increasing nervousness over the Fukushima nuclear power plant where engineers are scrambling to prevent a meltdown.
Premiums on retail prices of gold bars in Tokyo rose on Thursday to $2 an ounce over London spot prices from par before the quake.
The yen soared to a record high of 76.25 per dollar, flying past its previous record high of 79.75 which occurred in the wake of the Kobe earthquake. The yen later back tracked to around 79.00 per dollar, marking extreme volatility for a major currency and relatively illiquid conditions.
Fear is the only factor driving the market today and if you look at news about temperatures rising, things exploding, you're not going to trade calmly, right? said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Currency traders said the market was disorderly during the yen's surge.
It's mayhem out there, said a trader at an Australian bank in Sydney. The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in.
Japan's Nikkei stock market index fell on Thursday by 1.4 percent, for losses this week of more than 12 percent. Shares elsewhere in Asia fell 1 percent, for losses this week of 2.7 percent.
U.S. stocks lost ground on Wednesday on Japan concerns. The broad S&P index and the tech-heavy Nasdaq fell into negative territory for 2011.
The so-called Wall Street fear gauge -- the CBOE volatility index -- jumped 21 percent, the biggest percentage gain in almost a month.
With world alarm rising, operators of the nuclear power plant in Japan dumped water on overheating reactors on Thursday as engineers worked furiously to run power from the main grid to fire up water pumps needed to cool two reactors.
The worst-case scenario doesn't bear mentioning and the best case scenario keeps getting worse, said Perpetual Investments, one of Australia's biggest fund managers, in a market note.
(Additional reporting by David Chance, John Mair, Kevin Lim, Yoo Choonsik; Writing by Neil Fullick; editing by Vidya Ranganathan)