Following the huge losses on the Nikkei, with more than $700 billion dollars wiped off the Japanese market in just two sessions, one economist is predicting the tragic events in Japan will be an "excuse" 'to move to quantitative easing in all major markets.
"The key thing to watch over the next few sessions will be the size of repatriation from Japanese assets from overseas and its impact on currencies," Steen Jakobsen, chief economist at Saxo Bank in Copenhagen, said.
We are very likely to see the Japanese withdraw and size down overseas credit as the insurance companies will need to raise their cash reserves."
"The market is underestimating the size of Japanese recycling of capital and especially their size in trade finance,” Jakobsen said.
Investors should be prepared for Japanese investors selling European and US bonds in favor of Japanese Government Bonds, he said.
“The combined impact of the Middle-East crisis and the earthquake will increase the home bias, the tendency to invest close to home, as cash becomes king, and Japan is by far the biggest capital exporter over the last decade, despite all the talks of China,” Jakobsen noted.
Eventually the yen could trade at 65 to the dollar, which would raise the cost of capital as “global recycling short-circuits,” he said.
“We are also entering financial year end for corporate Japan, which can only add to the volatility. Despite all this, there is fair chance that this is merely a correction," Jakobsen said.
"There is political will and demand for further stimulus.”
The earthquake and situation in the Middle East will provide an excuse for the Federal Reserve to buy more bonds (QE3) and for the European Central Bank and the Bank of England not to raise interest rates, he added.