If it's so good a mechanic why does the Master Sword not break permanently? Instead it repairs over time -- which is exactly what other games with item damage usually let you do, repair (over time, with an item, or talking to someone). It's a better mechanic than permanent breakage for everything, but if you really want it you can add in a point-of-no-repair. Having just one item be different here is a smell.

The power issue is separate and can be resolved (or not, it's sometimes fun to immediately feel like a badass while never being invincible) in a lot of ways. I don't really see how permanent weapon damage would make much difference in those tradeoffs, at least compared to a game that has repair.