UPDATE 2-Japan service sector sentiment plummets on quake

* March service sector sentimetn hits lowest since Feb 2009

* Earthquake, nuclear disaster to weigh on economy

* Government trying to secure funding for budget in response
to quake

* Large public debt is obstacle to rebuilding after
earthquake

(Recasts, adds details)

By Stanley White and Rie Ishiguro

TOKYO, April 8 (Reuters) – – 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 on Friday.

The survey offered the first glimpse of the damage to
business and consumer sentiment from the March 11 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. [ID:nLJE7EU00B]

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.[ID:nL3E7F80L8]

On Thursday, the central bank 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.
[ID:nL3E7F70JG]

The government estimates the material damage alone could top
$300 billion, making it by far the world’s costliest natural
disaster.

BLOW TO SENTIMENT

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 25-31 gave some
sense of that impact, with its indicator of confidence in future
conditions also dropping sharply.

The finance minister reiterated on Friday 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 11 of a
first extra budget to clear wreckage and provide temporary
housing for the country’s devastated northeast, Japanese media
reported on Friday.

Ruling Democratic Party lawmakers have indicated that the
first spending package would total 4 trillion yen ($47 billion),
but Finance Minister Yoshihiko Noda said nothing has been
decided as politicians hurry to compile what is likely to be the
first of several spending packages to support reconstruction.

“There is no change to my basic stance that we should
compile an extra budget of significant size without selling new
bonds,” Noda told reporters after a cabinet meeting.

The government is wary of adding to a pile of public debt
that is already twice the size of its $5 trillion economy.
[ID:nL3E7F71AE]

Economists say that even though the bond market should be
able to digest 5-10 trillion yen in new debt without a spike in
yields, the worry is that the temptation to borrow even more
could prove too strong to resist.

Given the scale of the damage, politicians are groping for
ideas on how to fund government spending.

Some have called for the Bank of Japan to directly by bonds
from the government so it could spend more, but Economics
Minister Kaoru Yosano reiterated government opposition to the
idea saying it would amounting to simply printing money.

Prime Minister Naoto Kan has not ruled out a disaster tax to
pay for reconstruction costs. The government has shelved 5
percent of public works for the fiscal year that started on
April 1, 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.
($1 = 84.960 Japanese Yen)

(Additional reporting by Leika Kihara;; Editing by Michael
Watson and Tomasz Janowski)

UPDATE 2-Japan service sector sentiment plummets on quake