The continuing Fukushima nuclear crisis is proving to be a greater threat to the health of the Japanese economy than the impact of the March 11 quake and tsunami.
On Friday the country joined the US and Italy among the major western economies in having its international credit rating pushed to a negative outlook by nervy ratings firms.
Fitch Ratings said the reason for the changed outlook was the risks associated with the continuing Fukushima nuclear power plant crisis and the potential impact that could have on the country's already high gross debt ratio which is the highest of any country it tracks.
That's unlike Italy and the US where it is high deficits and rising debt that is worrying the rating firms.
Fitch says while Japan's deficit and debt are very high, it is not their main concern, it's the damage the Fukushima disaster could do to economic growth as well as the actual cost of cleaning it up and protecting the site in the future.
Fitch rates Japan an AA- risk as a long-term local currency risk.
The move by Fitch brings it into line with the negative outlooks already in place from earlier times from Moody's and Standard & Poor's.
Fitch estimated that an extra 2% of GDP will be needed in government spending on rebuilding and repairing after the March earthquake over 2011 and 2012. (That's more than $100 billion.)
Fitch said these extra costs would have no impact on the ratings, but it singled out the Fukushima disaster (which has already all but bankrupted Tokyo Electric Power Co, the owner) for special mention.
"There is considerable downside risk for the public finances from the still-unknown cost of cleaning up the Fukushima nuclear plant, while delays in restoring power supplies could lead Fitch to revise down its 2011 growth forecast from 0.5%.
"There is a further risk that prolonged delays in restoring infrastructure could lead more Japanese corporates to consider relocating their activities abroad, leading to a greater permanent loss of output from the disaster, although it remains too early to gauge this effect."
Fitch is referring to the continuing power shortage that will keep output low from next month onwards, despite power companies, the government and business making wide ranging changes to try and avoid blackouts and plant closures.
Fitch's announcement came as there were more signs the economy is recovering from the March 11 disasters, although the nuclear crisis continues to linger, with no sign of any improvement.
But production figures for April out on Tuesday are tipped to show a small rise after the fall of more than 15% in March.
Retail sales are expected to show a small improvement as well, while employment data is also expected to be positive.
The change in outlook came as inflation figures showed the first positive reading in Japanese core inflation for 28 months in April.
The rise was mainly due to a rise in gasoline and electricity prices.
And domestic vehicle production by Japanese automakers plunged in April, following the March earthquake and tsunami.
Eight leading automakers announced on Friday that they produced a total of 279 thousand vehicles in April, down 60% from April 2010.
The March disaster forced domestic assembly lines to either stop operating or reduce output due to parts shortages.
Honda saw an 81% drop in output, Toyota at more than 78% and Mazda at nearly 50%. Nissan cut back by almost 49%.
But car companies say this is the trough and that since the start of May vehicle production and they will return to pre-disaster levels by autumn.
Actual domestic car sales fell by a record 51% in April (excluding mining cars). Including them, total sales were down 47.3%.
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