Stricken Tokyo Electric Power is “too big to fail”, analysts say, not only because it powers Japan’s economic heart but also because its collapse would create turmoil for the country’s financial system.

Asia’s biggest power company, Tepco, supplies electricity for the megacity of Tokyo and the wider Kanto region, an area that accounts for more than a third of the nation’s gross domestic product.

The firm at the centre of the world’s worst nuclear crisis in 25 years is also Japan’s largest corporate bond issuer, accounting for eight per cent of the country’s 62 trillion yen ($765 billion) corporate bond market.

“The main reason why the government cannot let Tepco go under is the utility’s crucial role as power supplier” to around a third of the population, said Mana Nakazora, chief credit analyst at BNP Paribas Securities Japan.

“The government took into account the big impact Tepco’s failure would have not only on compensation payments to those affected by the nuclear crisis at its plant, but also people’s lives and the financial market,” she said.

Prime Minister Naoto Kan’s government, Tepco executives and banks have scrambled to devise a plan to ensure a hefty compensation bill is met, Tepco shares stay listed and bondholders such as pension funds are protected.

The economic impact of power shortages and collapsing Tepco share value on banks and pension funds “contribute to the ‘too big to fail’ argument,” said Paul J. Scalise of the Institute of Contemporary Asian Studies, at Temple University, Japan Campus.

“The government has made it clear that Tepco must remain solvent in order to avoid blackouts and to avoid skyrocketing electricity prices,” he said, amid fears Tepco may have to eventually hike rates to help pay for compensation.

The situation has inevitably drawn comparisons to the US financial crisis of 2008. “Tepco is as large, if not larger, than some of the banks in question,” said Mr Scalise.

“Obviously, Tepco cannot be allowed to fail if such a failure implies continued blackouts and brownouts in the Kanto region beyond peak demand summer months of 2011, significantly impacting future growth, jobs and prosperity.”

The embattled utility’s Fukushima Daiichi plant is now permanently out of action, and 13 of the company’s 17 nuclear reactors are offline.

Japan generates about 30 per cent of its power from nuclear plants.

Hiroshi Watanabe, economist at Daiwa Institute of Research, said “curbs on power supply are curbs on corporate activities. The impact is very big.” Japanese industrial production saw a record fall in March.

Shares in Tepco are down nearly 80 per cent from pre-March 11 levels when an earthquake and tsunami knocked out cooling systems at the nuclear plant.

It caused reactors to overheat, triggering explosions and the ongoing release of radioactive materials nine weeks after the earthquake.

The worst nuclear disaster since Chernobyl in 1986 has forced the evacuation of tens of thousands of people from their houses, businesses and farms in a 20-kilometre radius around the plant. The compensation amount and costs associated with the clean-up are expec­ted to reach several trillion yen.

The government and Tepco have not released any estimates, but analysts say it could be anything from four trillion yen to 10 trillion yen depending on how long the nuclear crisis lasts.

The company secured around two trillion yen in emergency loans from major banks after the disasters but faces huge costs in decommissioning the Fukushima plant and 750 billion yen in bond redemptions due this year.

Ms Nakazora said that of the 62 trillion yen corporate bond market, Tepco bonds alone come in at five trillion yen and that domestic investors including pension funds hold nearly all of them. Its credit rating has been cut several times since the quake.

Failure to secure Tepco would threaten “a possible impact” on future pension payments to the Japanese public, she said.

Japan on Friday announced a scheme using public funds to rescue Tepco to ensure payment of compensation, amid last-minute disputes within the ruling party over how heavily the company should be penalised and who would pay.

Critics say this raises the issue of “moral hazard” – the suggestion that companies’ behaviour will be shaped by the knowledge the government will rescue them should they face difficulties.

With a track record of safety cover-ups, Tepco has been criticised for inadequately preparing for events such as that of March 11 amid perceived soft regulation by a government body responsible for promoting nuclear power.

Mr Kan has pledged to reconsider plans to boost Japan’s reliance on nuclear energy, but many doubt the nation has many other options in the face of soaring fuel costs.

“I am sceptical that Kan is serious,” Mr Scalise said. “I suspect it is just more political rhetoric designed to impress the electorate and counter his declining approval ratings than a firm change in national energy policy.”

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