GLOBAL MARKETS-Japan's quake drags down world stocks, lifts yen

Mon Mar 14, 2011 4:54pm EDT

* Japan stocks in biggest decline since October 2008

* U.S., European shares fall on fears over global recovery

* Emerging market stocks up on rebuilding hopes

* Dollar falls against yen; gold ticks up (Updates with New York close)

By Al Yoon

NEW YORK, March 14 (Reuters) - World stocks slid to six-week lows on Monday and the yen rose as the devastating toll from Japan's earthquake unfolded, raising fears of the impact on industries ranging from insurance to nuclear power.

The dollar fell against the yen and was seen testing the record low hit in 1995 as Japanese insurers and companies repatriated funds to help pay for claims and reconstruction.

Japanese stocks posted their biggest daily decline since October 2008 in record volume as traders considered economic losses in the world's third largest economy. The Nikkei index .N225 closed off 6.2 percent and the broader TOPIX index .TOPX slumped 7.5 percent.

The earthquake -- with many global companies facing disruptions after the destruction of vital infrastructure, damaged ports and factory shutdowns -- triggered worries that global growth would suffer a setback just as the world economy is emerging from the effects of the financial crisis. Japan's recovery costs could top $180 billion, or 3 percent of its annual economic output and more than 50 percent higher than the costs of the 1995 earthquake in Kobe, economists said.

"The earthquake could have great implications on the global economic front," said Andre Bakhos, director of market analytics at Lek Securities in New York. "If you shut down Japan, there could be a global recession."

Japanese gross domestic product may slide by 1 trillion yen in 2011, or about 0.2 percentage point, Hiromichi Shirakawa, chief economist for Japan at Credit Suisse, said in a client note. But deteriorating consumer confidence and production cuts could worsen the GDP drop as much as 1 percentage point, he added.

Before the disaster, Shirakawa estimated Japan's growth would slow to 1.4 percent this fiscal year from 3 percent in 2010.

Gold rose, recovering some of last week's losses, as the Japanese quake and heightened political unrest in the Middle East and North Africa drove safe-haven buying, driving prices toward recent record highs.

The MSCI world equity index .MIWD00000PUS traded down 0.72 percent to levels last seen in late January. It is down 4 percent from its February peak. The Thomson Reuters global stock index .TRXFLDGLPU shed 1 percent.

Emerging market equities were lifted by construction and refinery shares on expectations of large-scale reconstruction efforts in Japan as the country confronted what officials there called its biggest crisis since World War Two. For details see [ID:nL3E7EC0D6]

The pan-European FTSEurofirst 300 index .FTEU3 dropped 1.2 percent, while emerging markets stocks .MSCIEF rose 0.8 percent.

The Dow Jones industrial average .DJI dropped 51.24 points, or 0.43 percent, to 11,993.16. The Standard & Poor's 500 Index .SPX declined 7.89 points, or 0.6 percent, to 1,296.39 and the Nasdaq Composite Index .IXIC fell 14.64 points, or 0.54 percent, to 2,700.97.

Shares pared losses on expectations that the broad impact on equities would be short-lived.

Among shares most affected were those in the nuclear industry after explosions and damage at Japanese nuclear plants created doubts about the prospects of the industry. A second hydrogen explosion rocked a stricken nuclear power plant in Japan, sending authorities scrambling to avert a meltdown.

Industrial conglomerates were the largest contributors to the S&P 500 decline, while oil and gas firms buoyed the index. General Electric Co (GE.N) which has combined nuclear ventures with Hitachi Ltd (6501.T), fell 2.2 percent to $19.92.

Aflac Inc (AFL.N), the largest foreign insurer in Japan, fell 3 percent to $53.90 as experts estimated that the devastating earthquake in Japan could cost the insurance industry nearly $35 billion, making it one of the most expensive disasters ever.

Shares of luxury goods companies worldwide were also hit on worries about a drop in retail demand from Japan, which is the third largest market for luxury goods, accounting for 11 percent of lgobal luxury sales.

Tiffany (TIF.N) shares fell 5.3 percent and Coach (COH.N) declined 5.3 percent. In Europe, LVMH slipped 3.1 percent, Hermes (HRMS.PA) fell 3.1 percent, Richemont (CFR.VX) 2 percent, and PPR (PRTP.PA), which owns Gucci and Yves Saint Laurent, lost 2.5 percent.

The iShares MSCI Japan index exchange-traded fund (EWJ.P) tumbled 7 percent, and the Global X Uranium ETF (URA.P) dropped 17.4 percent

Brent crude LCOc1 edged down 0.2 percent to $113.64 a barrel, pressured by expectations that oil demand in Japan, the world's third-largest oil consumer, would fall as economic activity stalls following the quake. But conflicts in Libya and Yemen continued to be eyed by traders and offset the selling pressure.

In New York, U.S. crude oil 2CLc1 erased earlier losses to rise 3 cents, or 0.03 percent, to settle at $101.19 a barrel.

The dollar index .DXY, a gauge of the greenback against a basket of currencies, fell 0.6 percent. The euro gained 0.65 percent at $1.3997 EUR= after European Union policymakers surprised markets over the weekend by reaching significant agreements ahead of the March 24-25 heads of state meeting.

Against the Japanese yen, the dollar declined 0.24 percent to 81.69 yen on the repatriation bets. The dollar earlier had hit a four-month low against the yen, less than a yen from the 1995 record low, but pared losses as the Bank of Japan supplied banks with record funds to stabilize the stricken economy.

Most U.S. Treasury debt prices rose on Monday as investors looked for lower-risk assets while trying to gauge the eventual impact of the Japanese disaster and watching political turmoil in the Middle East and North Africa. Benchmark 10-year U.S. Treasury yields plumbed their lowest levels since January, falling 0.03 percentage point to 3.37 percent.

Spot gold prices rose $6.39, or 0.45 percent, to $1,423.30 an ounce. (Additional reporting by Edward Krudy, Steven C. Johnson, Robert Gibbons and Phil Wahba in New York and Japanese markets reporters; Editing by Leslie Adler)

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