And then disaster struck Japan.

Such issues have been put on the back burner after the government was confronted by the strongest earthquake on record ever to hit Japan and the subsequent tsunamis it unleashed, now set to claim well in excess of 1,300 lives.

The impact of the 8.9-magnitude quake may now threaten an economic recovery that was seen to be gathering momentum in the first quarter of this year after losing steam in the fourth quarter of 2010, analysts say.

"The timing of the disaster could not have been much worse," Capital Economics noted in a research report.

Analysts say it will take weeks to get a firm handle on the true extent of the damage inflicted on the nation and its economy.

"Temporary closures of factories and oil refineries and the shutting down of power stations are likely to affect output throughout the country," noted Wolfgang Leim of Commerzbank.

"Economic output may therefore shrink again slightly in the first quarter."

Japan's economy contracted by an annualised 1.3 percent in the quarter in the October-December quarter as the expiration of auto subsidies hit car sales, a new tobacco tax sapped cigarette demand and a strong yen hurt exports.

Before the quake struck, expectations were for the Japanese economy to be lifted by the rising tide of a global economic pickup in the first quarter as increasing export demand drove production higher.

But "the fragile economic cycle is not in a position to withstand significant disruption," noted Richard Jerram of Macquarie.

The aftermath has seen top Japanese firms suspend their operations in the affected areas. Automakers Toyota, Nissan and Honda have announced the total suspension of production in Japan until at least Monday. Sony has also shuttered plants.

The immediate prospects for Japan's atomic power industry are a key concern following a radioactive leak and explosion at a plant on Saturday.

While earlier fears of a nuclear meltdown receded after the government said the explosion left the radioactive core intact, there were still concerns as engineers struggled to cool overheating reactors by pumping seawater.

The Japanese nuclear industry provides around 30 percent of Japan's power needs.

In total, 11 of the roughly 50 nuclear reactors in Japan, located in the most affected areas, shut down following the earthquake.

"Gross domestic product in the first half could be noticeably depressed," said Commerzbank's Leim. But he added: "After that, though, the start of the reconstruction works will boost economic growth."

Repairing the colossal damage inflicted by the earthquake will require huge investment that analysts warn will support growth but stretch the government's already strained budget.

"The government will support the reconstruction work through fiscal policy", said Leim, adding that the opposition Liberal Democratic Party (LDP) has already promised Kan its broad support in the lower house.

Any economic downturn triggered in the immediate aftermath of a natural disaster is followed by increased spending to repair the damage, although the full extent of that damage in Japan at the moment is not yet fully clear.

But analysts warn Japan's efforts to consolidate the industrialised world's biggest debt, at around 200 percent of gross domestic product, will be pushed further into the future as the government borrows more to pay for reconstruction.

This could spell bad news for a nation that was in January downgraded one notch by ratings agency Standard & Poor's on concerns the government lacked a "coherent" policy with which to address its finances.

Last month rival agency Moody's maintained the pressure as it lowered its outlook on Japan's sovereign debt to "negative".

Before the quake hit, the government was seen to be in a precarious position as it struggled to push funding bills for its $1.1 trillion budget for the fiscal year beginning April 1, pointing to a possible government shutdown in the summer.

A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by a central government struggling to bring the industrialised world's largest debt under control.

"Overall, it will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster," Capital Economics said.

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