Japanese service sector sentiment plunged to its lowest since the depths of the global financial crisis after a deadly earthquake and tsunami hit the country's northeast, a government survey showed.

The survey offered the first glimpse of the damage to business and consumer sentiment from the March 11th disaster that left nearly 28,000 dead or missing and triggered the world's worst nuclear accident since Chernobyl 25 years ago.

"Japan's economy is suddenly in a severe condition due to the effects of the earthquake," the cabinet office, which released the data, said.

The March survey of workers such as taxi drivers, hotel employees and restaurant staff - called "economy watchers" for their proximity to consumers - showed the biggest ever drop in confidence to its lowest since February 2009.

The magnitude 9.0 quake struck just as the world's third largest economy was emerging from a temporary lull and the Bank of Japan warned that output and exports would remain weak for some time.

"Output will hover at a low level for the time being but then start to increase as supply constraints are mitigated," the central bank said in its monthly report for April.

The central bank yesterday decided to launch a soft loan scheme for banks in quake-hit areas and expressed readiness to ease its ultra-loose monetary policy further if needed.

The government estimates the material damage alone could top $300 billion, making it by far the world's costliest natural disaster. It will be harder to measure the impact from a crippled nuclear power plant in the northeast, as fears of leaking radiation weigh on sentiment and a shortage of electricity slows factory output.

The government survey carried out on March 25th-31st gave some sense of that impact, with its indicator of confidence in future conditions also dropping sharply.

The finance minister reiterated that the government should avoid issuing new debt to fund its response to the earthquake in a sign that the country's fiscal debt burden will limit how much can be spent for much-need reconstruction.

The government is likely to outline details on April 11th of a first extra budget to clear wreckage and provide temporary housing for the country's devastated northeast, Japanese media reported.

Prime minister Naoto Kan has not ruled out a disaster tax to pay for reconstruction costs. The government has shelved 5 per cent of public works for the fiscal year that started on April 1st, saving about 300 billion yen. Still, it faces pressure to cut welfare spending and foreign aid to free up more money.

Complicating matters further, the ruling party lacks a majority in parliament's upper house and needs opposition support to pass a bill needed to issue new debt.

Markets are keeping a close eye on how much more the government will borrow to fund disaster relief costs, although Japan does not face a Greece-style debt crisis because its public debt is held almost entirely by domestic investors.

Public pension funds and state-backed lenders are also big holders of government debt, which helps to keep borrowing costs low compared with other major economies.

Reuters