Japan's already weak economy faces deeper damage than initially thought from the triple blow of a devastating earthquake, tsunami and nuclear disaster, and risks prolonging its sluggish recovery.
At worst, forecasts from some economists suggest the world's third largest economy is in danger of slipping back into recession.
The hit to growth from Japan's worst crisis since World War 2 is likely to exceed that of the 1995 Kobe earthquake, when industrial output fell but overall output remained strong, analysts said -- a downgrade from their first estimates after Japan was hit on Friday by its largest earthquake on record.
This time the yen is stronger, hampering exports, and Japan's debts -- twice the size of the $5 trillion economy -- are much bigger. It also faces a major power problem.
Rolling power blackouts begin on Monday, which will lower production. Car and semiconductor factories and oil refineries in the north-east region are closed. And Japan may raise taxes to pay for relief work, reducing consumer spending.
We now expect the Japanese economy to take longer than we expected to exit its current soft patch owing to the earthquake and tsunami, Nomura analysts Takahide Kiuchi and Okazaki Kohei wrote in a note to clients.
Nomura expects the economy, which shrank late last year, won't shake off its lull until the third or fourth quarter.
In contrast, some analysts initially had seen a return to growth in the April to June period.
Nissan Motor halted output at all its four domestic assembly factories and said restarting them could depend on whether it can get parts, one of many companies unsure of how quickly they can get their plants back up and running.
Power supply also is critical factor in estimating the loss to the nation's productive capacity. Nuclear power plants are offline, and officials are grappling to control the damage and radiation leakage.
Ward McCarthy, chief economist at Jefferies in New York, called this development troubling. It just increases uncertainty at a time when uncertainty is already high, he said.
If power production output is damaged in a sustainable fashion, that could have a durable impact, said Michala Marcussen, head of global economics at Societe Generale.
Export-dependent Japan already faced vulnerabilities. The European debt crisis, an oil price spike and a still fragile recovery in the United States have all posed challenges.
Add to that a potential drop in Japanese consumption, said Brendan Brown, head of economic research at Mitsubishi UFJ. Consumers will be under influence of squeezed incomes and trauma, he said.
This will feed into global growth through Japan's trade.
The primary effect on the world economy will be on big trade partners in Asia, including China and Korea, said Brown.
WATCH CREDIT RATINGS
Providing at least some relief for officials, credit ratings agency Moody's Investors Service suggested on Monday that it sees no sign of a fiscal crisis in Japan. A day earlier it said the temporary fiscal impact would not be a big factor as it ponders whether to downgrade the country's credit ratings.
Japan was downgraded by Standard & Poor's in January, given the lack of a plan to fix public finances, and Moody's has warned it may do the same.
There are some positives. Some economists said the huge influx of government spending needed to repair the damage could help the Japanese economy eventually shake off its long period of sluggish growth and falling prices.
The question is: does this finally push them out of the deflationary spiral and allow them to get their economy back on track, or does it push them deeper down? said Sharyn O'Halloran, a professor of political economy at Columbia University.
After the 1995 Kobe earthquake, there was a big drop in industrial output, but the economy grew strongly that year and the effects of rebuilding gave it another boost in 1996. Back then, oil prices were hovering around $17-21 a barrel while the yen, key to exporters, was around 100 per dollar when the quake hit.
Currently with oil prices just off 2- year highs above $100 and the Japanese currency at a stronger 82 per dollar, the impact from these two factors alone will be more adverse.
Japan's gross domestic product shrank by an annualized 1.3 percent in fourth quarter. A Reuters poll published before the quake showed it was likely to expand 0.5 percent in Q1, or roughly 2 percent on an annualized basis.
Bank of America Merrill Lynch estimates the quake-hit areas account for up to 7.8 percent of Japan's GDP, compared with 12.4 percent from the regions affected by the Kobe earthquake.
The bank expects the hit to GDP to be at least 0.2-0.3 percentage point, although a relatively large amount of spare capacity may offset the production loss.
The yen rose sharply following the Kobe earthquake as Japanese companies repatriated capital, a pattern which may gather momentum in the coming week.
The Bank of Japan offered to pump a record $183 billion into the banking system on Monday to stabilize markets after the quake.
The central bank may also ease monetary policy further at its meeting on Monday. With interest rates virtually at zero, the most likely option is for the BOJ to top up the 5 trillion yen pool of funds it put in place last year to buy assets ranging from government bonds to private debt -- a factor that could weigh on the yen.
Nomura said the BOJ could increase the scale of its asset purchases to 8-10 trillion yen.