The world's second largest economy, already weakened by deflation, record unemployment and low consumption, is now braced for more difficulties because of the war in Iraq. Government officials and many economists agree that a drawn-out conflict could be disastrous for Japan's ailing economy.
Economy Minister Heizo Takenaka says he expects a minor impact on economic growth, if the war ends soon, but major problems, if the conflict continues for a long time.
Japan is largely dependent on the Middle East for its oil supplies. So, if Iraq's oil fields are damaged as prices spike, the Japanese economy is in for trouble.
Japan's Central Research Institute of the Electric Power Industry, a think tank for Japan's energy sector, predicts that such a scenario could shave one percentage point off this year's gross domestic product.
A long lasting war is bound to hurt American and Asian economies, which will impact Japan's exports, one of the few healthy sectors. Expert estimates suggest that, if the war in Iraq lasts more than three months, it could mean that Japanese economic growth could slow as much as three percentage points.
The Bank of Japan has moved to stabilize the country's markets and banks during this war period. The central bank on Thursday injected $8 billion into the financial system to keep money flowing. The move raises the amount of excess cash to $200 billion, the highest in a year.
Japan's stock market has fallen to 20-year lows recently, partly on concerns about Iraq, as well as worries about the domestic economy.
The central bank's new governor, Toshihiko Fukui, who took office Thursday, pledged to do his best at what he called "crisis management," and promised to handle the situation calmly.
Japan's corporate sector is also preparing for business disruptions that could result from the war and are almost certain to increase costs. For instance, Nippon Yusen KK, the country's largest shipping line, will reroute some shipments around Africa to avoid the Middle East, even though it will boost costs by $34 million a month.
Japan's major automakers, Honda, Toyota and Nissan, are ratcheting up production at some overseas plants and stockpiling parts in case shipments are delayed.