Japan will repatriate more funds than markets expect to finance its reconstruction efforts following its devastating earthquake and tsunami, Mohamed El-Erian, co-chief investment officer of top bond fund Pimco, said Thursday.
A significant repatriation of Japanese investments overseas would likely strengthen the yen despite efforts by the Bank of Japan to curb the currency's appreciation and protect the country's exporters.
"Right now people say there will be very little repatriation. I look at the numbers and I believe there will be more repatriation than the markets think right now," El-Erian, who helps oversee more than $1.1 trillion in assets at the Newport Beach, Calif.-based firm, said at a Reuters Newsmaker event.
To a lesser extent, El-Erian expects Japan to resort to additional government borrowing and monetization of its debt to help fund an estimated $300 billion worth of rebuilding.
"I think it will be a combination of all three," he said.
Forecasts that Japan will issue a large amount of debt in coming years are mostly based on the experience of the Kobe quake in 1995, El-Erian said. This time, however, the country's debt situation is much more complicated, he said.
"The Japanese are inherently cautious. They recognize that the debt dynamics are at a state where you don't want to take chances."
Japan's debt burden currently stands at 200 percent of its gross domestic product, compared to about 85 percent when Kobe struck.
Japan will also be "tempted" to print money to pay for the reconstruction bill, but concerns about inflation and higher interest rates will likely limit that option too, El-Erian said, noting that higher interest rates would have negative consequences given the country's massive debt burden.
Last week, the International Monetary Fund said that, even if Japanese insurers were to sell foreign assets to pay rebuilding claims, it believes that would not materially affect the yen's value.
El-Erian said the U.S. dollar, the euro as well as the yen all have "issues" right now and he has consequently been using those currencies to fund purchases of currencies of "successful" and higher-yielding emerging markets.
But Pimco can adjust the composition of the currencies it uses to fund those so-called carry trades if the yen strengthens due to repatriation flows, he said.
GOING BACK TO TREASURYS?
Pimco, which earlier this month said its Total Return Fund had dumped all its holdings of U.S. government debt, would reconsider dipping its toes back into that market, including Treasurys, if it sees value in them again, El-Erian said.
Pimco decided to sell out of its position in Treasurys last month because "we were finding Treasury-like instruments offering better value elsewhere," he said.
"If the valuations of Treasurys get cheaper, we will revisit that" decision, El-Erian said.
Bill Gross, who shares the title of co-chief investment officer at Pimco and oversees the $236.9 billion Total Return Fund, has repeatedly warned against U.S. deficit spending and its inflationary impact, which undermines the value of government debt and pushes up yields as investors demand more compensation for risk.
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