Japanese shares look set to tumble this week while government bonds and the yen are expected to gain, although market players are still trying to gauge the impact of the country's worst earthquake in modern history.

Japan's Nikkei average <.N225> may tumble below 10,000 on Monday as investors will likely shift to safer assets following after Friday's massive earthquake and tsunami, with the long-term impact uncertain as nuclear disaster looms.

The Nikkei futures last traded in Chicago on Friday

at 10,005, and initially investors said the slide might be limited as major cities and manufacturing sites were mostly intact.

But investors sentiment soured by Sunday night, with Japan scrambling to avert potentially disastrous meltdowns at two nuclear reactors and the extent of the total damage unclear.

Market players also said a long-term rebound for stocks may take much longer than after the 1995 Kobe earthquake. They noted that holdings by foreigners, who deal heavily in large-cap stocks affected by the quake, account for more than 60 percent of the total market. In 1995, they accounted for 29 percent.

Initially all sectors will be under selling pressure. The Nikkei can drop about 20 percent from a recent high of around 10,900. It could fall below 9,000 in the near term, said Masaru Hamasaki, senior strategist at Toyota Asset Management.

PUTTING PRESSURE

Another factor putting pressure on blue chip exporters such as Toyota Motor Corp <7203.T> other auto- and electronics-makers like Hitachi Ltd <6501.T> would be a possible strengthening of the yen. Domestic investors, especially retail ones, may rush to sell their foreign currencies and assets to shift back to the yen as they may want to the Japanese currency. We've seen such a move in the Kobe earthquake in 1995, Hamasaki said.

Construction companies such as Kajima Corp <1812.T> and construction machinery makers like Komatsu Ltd <6301.T> were seen as potential gainers on increased demand. A short-term sell-off must be inevitable, but reconstruction moves may offset the long-term impact from the earthquake, said Seiichiro Iwasawa, chief strategist at Nomura Securities.

Manufacturers will likely see sizable falls due to factory closures. Nissan Motor Co <7201.T> halted production at all four of its car assembly factories in Japan and will not re-start on Monday while Panasonic Corp <6752.T> said continuing aftershocks were preventing it from inspecting two factories in northern Japan. Nuclear energy-related firms and utilities were also poised to drop. The government on Sunday said there was a risk of a fresh explosion at the Tokyo Electric Power Co's (TEPCO) <9501.T> Fukushima Daiichi nuclear plant, some 240 km (150 miles) north of Tokyo, after the roof blew off another reactor building the previous day. The Nikkei may trade between 9500-10,000 for the coming days, with an immediate support level seen at its 200-day moving average of 9840, said Nomura's Iwasawa. The Nikkei fell 8 percent in the first five days after the 1995 earthquake that devastated Kobe and its vicinity. But it rose 5 percent during the next 10 days, therefore history suggests that this earthquake will not likely derail the whole economy.

JGBS, YEN TO GAIN

Japanese government bonds are likely to gain initially after the deadly earthquake dented Japan's economic outlook. The gain may be led by the seven-year sector, the cheapest to deliver for the futures contract.

The cost of insuring against Japan's default in the credit swap market could rise on worries about its mounting debt and that could put pressure on JGBs, particularly in the longer-end of the yield curve in the future.

But such worries could be partly tempered by news that Japanese ruling and opposition parties will put aside their bickering to discuss a temporary tax rise to fund quake relief efforts.

The yield on the benchmark 10-year Japanese government bond last traded at 1.270 percent on Friday before trading was suspended following the earthquake.

The benchmark futures stood at 139.27 at the end of evening trade on Friday, having risen about 0.40 point from its levels before the earthquake.

The Bank of Japan is expected to inject a large amount of liquidity in money markets in coming days to keep short-term interest rates in check.

The yen bounced back from an initial dip to rise on Friday after the earthquake, a move reflecting some expectations that Japanese investors could bring back funds from their hefty foreign investments as happened in the weeks after the 1995 Kobe earthquake.

Foreigners do not have many assets in Japan while Japan is the world's largest creditor nation. And Japanese investors are likely to bring some of their money back home, said Tohru Sasaki, the head of forex research at J.P. Morgan Chase Bank.

(Additional reporting by Chikafumi Hodo and Hideyuki Sano; Editing by Richard Borsuk)

(Created by Hideyuki Sano)

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