Japanese stocks fell 6 percent and long-term government bond yields rose on Monday as investors expected the massive earthquake and tsunami that devastated the country's northeast to take a toll on the economy and require significant government borrowing.
The yen also slid against the dollar, reversing earlier gains after hedge funds unloaded the Japanese currency after the Bank of Japan added a record 15 trillion yen in emergency same-day funding to keep money markets stable.
The Japanese government bond yield curve steepened, with super-long debt retreating as market players anticipated the potential fiscal costs of future rebuilding efforts, even as short- to medium-term JGBs rallied.
Japanese automakers and, electronics firms and oil refiners saw their share prices drop by double digit percentages after having to shutter key factories after Friday's earthquake and tsunami, which are feared to have killed more than 10,000 people and severely damage infrastructure.
Investors are selling aggressively as they want to remove risks. The market will sell until they have completed their selling needs, but I really can't tell the extent of a possible sales as this is not the normal market condition, said Hiroshi Arano, advisor at Mizuho Asset Management in Tokyo.
The market will be very cautious about buying Japanese shares even though the value of Japanese shares are attractive after falls. The market will see the condition of the actual state of the Japanese economy over the next two to three months, before making any concrete decision, Arano said.
Analysts say the country's economy is likely to suffer a setback at least in the near-term, and risk modeling company AIR Worldwide has said last week's earthquake could lead to insured losses of nearly $35 billion.
The recent major earthquake is bound to exert downward pressure on Japanese equities as a whole over the near term, analysts at Nomura said in a research note.
Based on declines after the Kobe earthquake, we expect the TOPIX and the Nikkei average to decline and then rebound in ranges around 850-900 and 9,500-10,000, respectively, they said, referring to a 1995 earthquake that struck western Japan.
CONSTRUCTION FIRMS IN DEMAND, TECHNOLOGY DUMPED
Japan's Nikkei stock futures fell about 7 percent <0#JNI:> compared to the regular session close on Friday 9,470.
Futures for the broader TOPIX index were down 5.7 percent. Trade was briefly halted earlier because of the big gap between buy and sell orders, an indication of illiquid conditions that make pricing assets difficult.
The benchmark Nikkei index <.N225> fell 4.5 percent to 9,789.55, with technology companies such as Kyocera Corp <6971.T> and Canon Inc <7751.T> the biggest drags on the market.
Shares of Tokyo Electric Power <9501.T>, Japan's biggest utility that owns a nuclear plant in the northeast that may be close to meltdown, were a big focus for the market. The stock was untraded on a glut of sell orders and was last quoted at 1,621 yen, down about 24 percent from Friday's close.
Tokyo Electric has battled to cool damaged reactors at its Fukushima plant damaged by the quake and subsequent tsunami on Friday, forcing it to vent radioactive gas to relieve pressure inside the reactors. The Fukushima plant was rocked by a hydrogen blast on Monday, and officials were not able immediately to confirm if any radioactivity was leaked.
It will be very difficult for Japan to stop its reliance on nuclear energy, and such energy is necessary for stable economic growth of the country, so if the post-incident inspection is negative, it will impact economy in the long run, Shinichi Ichikawa, chief market strategist for Credit Suisse in Tokyo.
Shares of Japan's top three nonlife insurers MS&AD Insurance Group <8725.T>, Tokio Marine Holdings Inc <8766.T> and NKSJ Holdings Inc <8630.T> fell sharply on concern they will be face massive payouts following the earthquake that hit the coastline of northeastern Japan, with Tokio Marine sliding 15.9 percent to 2,112 yen.
Construction-related businesses rallied on the back of expectations for demand from rebuilding efforts, with Kajima Corp jumping 37.3 percent to 291 yen <1812.T> and Taiheiyo Cement climbing 27.4 percent to 144 yen <5233.T>.
In the month after the earthquake in Kobe in January 1995, construction stocks sharply outperformed the broader market.
In the bond market, the five-year/20-year JGB yield spread widened by 11.5 basis points to a three-month high of 159.5 basis points, indicating investors were selling longer-term maturities.
Super-long JGBs, 20 to 30-year bonds, were hit by concerns about the fiscal impact from the damages caused by the earthquake and as market players braced for the possibility that Japanese life insurers may sell the segment of the yield curve to fund payments to policy holders.
Moody's Investors Service told Reuters the economic impact from the earthquake and tsunami was worse than initially expected, adding that Japan's target of issuing 44 trillion yen in JGBs this year would most likely be overshot because of financing needed for reconstruction.
Short-term to 10-year JGBs rallied, supported by the BOJ's decision to supply ample liquidity to the money market.
The yen rallied broadly in early Asia but quickly pared gains in volatile trade as nervous traders waited to see what action Japanese officials will take to keep markets calm after Friday's quake and tsunami.
A fund manager at a Japanese trust bank said that most Japanese traders were sidelined this morning because there was some uncertainty about whether trades would be settled properly with many banks lacking manpower due to disruptions to public transport.
The dollar initially extended its losses after having slid more than one percent against the yen on Friday, touching a four-month low around 80.60 yen. The dollar later rebounded sharply in thin trade and last stood at 82.18 yen, up 0.5 percent on the day.
The Bank of Japan, which holds a policy meeting on Monday, injected 7 trillion yen into the money market via a same-day operation. It later injected an additional 5 trillion yen in same-day funds and a BOJ official said the central bank will closely monitor the currency market in deciding the need for further market operations.
(Additional reporting by Yoshiko Mori and Hideyuki Sano and Masatsugu Hisatsune at IFR, Writing by Masayuki Kitano; Editing by Kevin Plumberg)