The move came after the Bank of Japan last week downgraded its view of an economy ravaged by the quake and the monster wave it unleashed, which destroyed entire towns and left more than 28,000 dead or missing.

"The economy was picking up, but it has shown weak signs recently due to the impact of the Great East Japan Earthquake," the Cabinet Office said in its monthly report. "It remains in a severe condition."

The quake and tsunami devastated infrastructure and manufacturing facilities in northeastern Japan, plunging the nation into its worst crisis since World War II. An ongoing nuclear emergency had added to the uncertainty.

"The biggest risk, the most uncertain factor for the economy is the issue of power supply and the status of the power plant," fiscal policy minister Kaoru Yosano told reporters, referring to the stricken Fukushima Daiichi facility.

Wednesday's report warned exports may decline, production was stagnating and consumer sentiment eroding in the quake's aftermath.

The International Monetary Fund (IMF) on Monday cut its forecast for Japanese growth, while others were even more pessimistic.

"There will be such a sharp decline in GDP in the first half of the year that the economy will not be able to avoid a full year recession in 2011," Capital Economics said in a research note.

Key supply chains have been broken and power shortages have crippled production for Japan's biggest companies, such as Sony, Toyota and Honda.

Output overseas has also been compromised, with a shortage of Japanese components affecting global markets.

The Bank of Japan's Tankan survey last week showed Japanese business confidence in the outlook for the next three months had plunged.

On Wednesday the government said that once production was restored, the economy was likely to pick up, but highlighted ongoing electricity shortages as a key risk.

Many power plants were damaged and electricity supply in affected areas is expected to fall well short of demand, especially in the summer peak season.

"Downward risks still remain due to factors including power shortage, slow recovery of disrupted supply chains and soaring oil prices. Attention needs to be paid also to the deflationary trend and concerns over employment."

The government aims to compile a stimulus package this month that cabinet members have been reported as saying could be around four trillion yen ($47 billion).

Japan has said the cost of rebuilding could be as much as 25 trillion yen.

The estimate does not include the potential cost of contamination of the food and water supply from the crippled nuclear plant.

The monster wave knocked out reactor cooling systems at the plant north of Tokyo, causing explosions and the release of radiation.

Tens of thousands of people have been evacuated from a 20-kilometre (12-mile) radius around the plant amid a contamination scare that has led to restrictions on farm produce and overseas bans on the import of Japanese goods.

Japan upgraded its nuclear emergency to a maximum seven on an international scale of atomic crises on Tuesday, putting it on par with the Chernobyl disaster.

Officials have stressed however that far less radiation has been released and no one had died from contamination at the Fukushima site.

Unlike at Chernobyl 25 years ago, where the reactor vessel exploded and scores died from radiation exposure within weeks, Japanese crews have been able to work on site amid efforts to shut the plant down.

Chief Cabinet Secretary Yukio Edano warned on Wednesday however that economic fallout needed to be quickly minimised.

"The nuclear plant accident has affected agriculture and fisheries products not only near its neighbouring areas but in the Kanto region, which has placed an extra burden on local people," Edano told reporters.

"We have to make an effort to minimise the impact on the economy by settling down the issue as soon as possible."

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