“The condition of the economy is no longer flat or at a standstill, but rather the direction is downward,” said Shigeru Sugihara, director of macroeconomic analysis at the Cabinet Office.
This was expected given the seriousness of the disaster that hit many companies in northeastern Japan, destroying factories and blocking supply chains.
The continuing emergency situation at the Fukushima Daiichi nuclear plant is also fuelling uncertainties about power supplies. The shortfall is expected to last well into the summer.
Meanwhile, power shortages have resulted in rolling blackouts, affecting production at some of the country's biggest companies.
The government expects exports to decline, until production does not reach full capacity. Even before the quake, the Japanese economy was struggling to climb out of the crisis.
Japan estimates rebuilding will cost up to 25 trillion yen (US$ 295 billion).
The costs companies pay for energy and unfinished goods rose 2 per cent from a year earlier, the highest increase in two years, eating away at corporate profits.
On Monday, the International Monetary Fund (IMF) cut its forecast for Japanese growth.
In the meantime, Toyota suspended car production at five European plants for several days in April and May (two in Great Britain and one in France, Poland and Turkey each) because component supplies from Japan remain limited.
The announcement comes a day after the Japanese carmaker announced similar shutdowns in North America.
In Japan, Toyota will resume production on 18 April in the plants closed by the quake. Factories will be shut down again between 27 April and 9 May, although that includes the traditional Japanese Golden Week holiday.
According to the latest figures, the death toll from the quake and the tsunami now stands at 13,333 with more than 15,000 missing. More than 150,000 people are homeless.
The country however wants to get back on its feet. Prime Minister Naoto Kan in fact has urged a return to normality for those living in unaffected areas.
In a televised address on Tuesday, he said, "Let's live normally without falling into excessive self-restraint," which people have imposed on themselves in solidarity with the victims.
Experts agree that Japan should start growing again by the end of the year.