Japan will repatriate more funds than markets expect to finance its reconstruction efforts following its devastating earthquake and tsunami, the co-chief investment officer of top bond fund PIMCO said on Thursday.

Mohamed El-Erian, who helps oversee more than $1.1 trillion in assets at PIMCO, said he expects Japan will also resort to additional borrowing and some monetization of its debt to fund an estimated $300 billion worth of rebuilding.

I think it will be a combination of all three. I think there will be more repatriation than markets think right now, he said at a Reuters Newsmaker event.

Forecasts that Japan will issue a large amount of debt in coming years are mostly based on the experience of the Kobe quake in 2005, El-Erian said. This time, however, the country's debt situation is much more complicated, he said.

The Japanese are cautious. They recognize that the debt dynamics are at a state that you don't want to take chances.

In the days after the March 11 earthquake and tsunami, the yen had soared on speculation that Japanese firms would repatriate billions of dollars in overseas funds to pay for the reconstruction bill.

El-Erian said the U.S. dollar, the euro and the yen all have issues right now, and as a result he is using those currencies to fund purchases of currencies of successful emerging markets.

It's no longer about your cleanest shirt. It's about your cleanest dirty shirt, El-Erian said, referring to the dollar, euro and yen.

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 its toes 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 we were finding Treasury-like instruments offering better value elsewhere, he said.

If the valuations of Treasuries 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.

(Editing by Leslie Adler)

Japan Investment