Eugene Hoshiko, Associated Press
LONDON — Japanese stocks led global markets lower on Monday as investors worried that the devastating earthquake and tsunami could derail an already-fragile recovery in the world's third-largest economy.
Developments elsewhere were more muted — an indication that investors think the costs facing Japan may not spill over significantly. In Europe, sentiment was partly supported by the weekend agreement of a broad package of measures to ease the government debt crisis that has already forced Greece and Ireland into seeking bailouts.
However, attention was centered on Japan, and how the country is dealing with the catastrophic events which last Friday laid waste to cities along the northeast coast, killed thousands, threatened nuclear facilities and potentially caused tens of billions of dollars in damage.
Financially, the situation is made even more difficult by the fact that Japan's debt stands at around 200 percent of its national income and its economy contracted once again in the last three months of 2010.
The Bank of Japan was quick off the mark Monday, injecting a record 15 trillion yen ($183.8 billion) into money markets to defend the already weak economy. By flooding the banking system with cash, the central bank hopes to support lending and meet the likely surge in demand for post-earthquake funds.
Japan's disaster has added to a growing sense in the markets that the recovery from recession is likely to be much more difficult than envisaged. A spike in oil prices following uprisings in the Arab world, most recently in Libya, and the prospect of higher interest rates, particularly in Europe, have already combined to darken market moods.
"A recession and possible fiscal crisis in Japan is another important threat to add to the long list of economic, political and financial uncertainties that threaten the sustainability of the global recovery," said Julian Jessop, chief international economist at Capital Economics.
Japan's main stock market suffered one of its worst days since the 2008 financial crisis — the benchmark Nikkei 225 dived 633.94 points, or 6.2 percent, to close at 9,620.49.
Worries about the economic impact of Friday's disaster, including massive power shortages that could disrupt factories, triggered a broad sell-off that hit all sectors, including nuclear power providers, carmakers and insurance companies.
While Japanese shares dropped, the yen struck a new four-month high against the dollar thanks to its status as a safe haven for investors to park their cash. However, the Bank of Japan's announcement took the shine off during a day of volatile trading.
By mid-afternoon London time, the dollar was 0.2 percent higher on the day at 81.64 yen. Earlier, the dollar had tumbled to a four-month low of 80.60 yen, not far above its post World War 2 low of 79.75 yen.
"The initial positive yen reaction likely reflects both a pick up in safe haven demand for the yen as broader market risk sentiment has deteriorated, and investors anticipating a pick up in quake-related yen supportive capital inflows," said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ.
The euro was 0.3 percent firmer at $1.3979, its fortunes bolstered somewhat by a surprisingly broad European package of measures to deal with the government debt crisis that has over the past year threatened the existence of the euro currency.
In weekend announcement, eurozone leaders increased the size of the bailout fund — the so-called European Financial Stability Facility — and lowered the interest rates on the loans bailed-out Greece has taken out. They also revealed that the bailout fund can buy bonds directly from governments in exceptional circumstances but only if those countries agree to further austerity measures.
The deal helped support European stock markets despite the worries over Japan, with stock indexes in Greece, Portugal and Spain up strongly.
Europe's main markets fared less well. The FTSE 100 index of leading British shares closed down 0.9 percent at 5,775.24 while France's CAC-40 fell 1.3 percent to 3,878.04. German shares fared even worse, partly because Germany has the deepest coffers in Europe and will have to pay the lion's share of the revamped bailout facility. The DAX index ended down 1.7 percent at 6,866.63.
U.S. stocks dropped sharply, too — the Dow Jones industrial average was down 1.1 percent at 11,911 while the broader Standard & Poor's 500 index fell 1.3 percent to 1,288.
Elsewhere in Asia, China's main stock market, the Shanghai Composite Index, rose 0.1 percent at 2,937.63 and the Shenzhen Composite Index of China's smaller, second exchange gained 0.9 percent to 1,310.99.
Hong Kong's Hang Seng gained 0.4 percent to 23,345.88 and South Korea's Kospi gained 0.8 percent to 1,971.23.
Meanwhile, oil prices fell amid the uncertainty generated by the Japanese quake despite ongoing worries about how the crisis in Libya will pan out. Benchmark crude for April delivery was down 77 cents at $100.40 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.
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