UPDATE 4-Japan to repatriate more funds than expected: PIMCO

* El-Erian also sees Japan borrowing and monetizing debt

* Massive debt burden to curb Japan’s borrowing

* PIMCO may “revisit” decision to dump U.S. Treasuries
(Adds graphic on yen)

By Jennifer Ablan and Walter Brandimarte

NEW YORK, March 31 (Reuters) – 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 on Thursday.

A significant repatriation of Japanese overseas investments
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, California-based firm, said in an interview with
Chrystia Freeland, Reuters Global Editor at Large. To see
video, click on http://link.reuters.com/qyv78r

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 with 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 and 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. For the yen’s
historical move, click on http://r.reuters.com/zag78r

GOING BACK TO TREASURIES?

PIMCO, which earlier this month said its Total Return Fund
had dumped all its holdings of U.S. government debt, would
reconsider dipping back into that market, including Treasuries,
if it sees value in them again, El-Erian said.

PIMCO decided to sell out of its position in Treasuries
last month because, he said, “we were finding Treasury-like
instruments offering better value elsewhere.

“If the valuations of Treasuries get cheaper, we will
revisit that” decision, El-Erian said.

To see video, click on http://link.reuters.com/maw78r

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.
(Editing by Leslie Adler and Andrew Hay)

UPDATE 4-Japan to repatriate more funds than expected: PIMCO