FLUCTUATING ECONOMY AFTER JAPAN'S QUAKE

A triple blow of earthquake, tsunami and one of Japan's worst nuclear accidents is set to damage the world's third largest economy, possibly more deeply and for longer than initially expected.

Power outages and possible tax rises are likely to hurt companies and households and could outweigh the mild economic aftershock from the 1995 Kobe earthquake, given that oil prices and the yen are stronger and Japan's debt pile is much bigger.

Rolling blackouts will start Monday, affecting businesses and households as the country grapples with its worst crisis since World War Two. More than 1 million people are without water or power and towns have been wiped off the map.

Already saddled with debt that is double the size of its $5 trillion economy and threatened by credit downgrades, the government is discussing a temporary tax rise to fund relief work.

Japan's economic growth is in a better profile than it was when the Kobe quake struck. But many say a noticeable hit to GDP, which was only just recovering from contraction at the end of 2010, is likely to be felt over the next several months.

"When we talk about natural disasters, we tend to see an initial sharp drop in production... then you tend to have a V-shaped rebound. But initially everyone underestimates the damage," said Michala Marcussen, head of global economics at Societe Generale.

"Power supply is a critical factor. If power production output is damaged in a sustainable fashion, that could have a durable impact on the economy."

Tokyo Electric Power Co (9501.T) said on Sunday it may have to conduct rolling blackouts in winter, in addition to summer.

"The earthquake will bring lots of things to a halt. We are going to see quite a dent on GDP, blackouts will lead to a sharp contraction of production," said Janwillem Acket, group chief economist at Julius Baer.

He estimated the damage would be felt for two quarters, but it was not likely to knock the economy back into recession.

"We know public finances are already weak, much weaker than they are during Kobe. Pressure for emergency tax hikes is there. But I don't think the economy will go back to recession."

GROWTH IMPACT

Following the 1995 Kobe earthquake, the economy shrank by 2 percent, followed by a V-shaped recovery. Back then, oil prices were hovering around $17-21 a barrel while the yen -- key to exporters -- was at around 100 per dollar when the quake hit.

Currently with oil prices at near 2-1/2 year high 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 Q4. A Reuters poll published before the quake showed it was likely to expand 0.5 percent in Q1, or roughly two percent on an annualized basis.