Gross domestic product contracted an annualized 5.1% from the previous quarter, ending six months of double-digit growth, as businesses cut investment, government outlays fell.
Japan's economy has shrunk more than expected during the first three months of the year, raising the chances of a dual economic downturn as the country struggles to catch the disease and accelerate its release of the vaccine.
The gross domestic product has reached a 5.1% annual agreement since last quarter, ending six months of double-digit growth, as businesses cut back on investment, consumers cut back on spending and government spending fell during a halt to a tourist promotion campaign to help the sick tourism industry.
Economists had forecast a total of 4.5%.
The worst-hit result leaves the economy in a precarious position this quarter, as Prime Minister Yoshihide Suga's administration struggles to find the right balance in a way that targets the virus that seeks to reduce economic damage and keep the Olympics on track.
"If the emergency situation is exacerbated, it will increase the chances of recession," said economist Yoshiki Shinke at the Dai-Ichi Life Research Institute. "Consumer spending is a huge loss in the economy and it is difficult to say because it depends so much on the state of the virus."
Suga last week added three more emergency regions, placing nearly half of the economy below slightly lower limits than in winter, but still much smaller than Europe. Restaurants and bars in major cities are now being asked to stop drinking alcohol in addition to closing early.
Failure to break the deadlines by the end of May and to avoid an economic downturn could put pressure on Suga to take further steps to revive the economy and maintain his hopes of survival as prime minister as the country enters general elections to be held in the fall.
Failure to catch a back infection can also affect pregnancy in the Tokyo Olympics. Cancellation of the Games will also affect the economy.
What the Bloomberg economist has to say ...
“In the details of Japan's much-anticipated GDP at 1Q, there has been a lot of bad news - an unexpected drop in private investment and a big unexpected rise in the books. This signal weakness in the manufacturing sector - a rare driver of growth in the midst of viral emergencies - also adds to the risk of a 2Q recession.
- Yuki Masujima, an economist
"The government could eventually put in extra budget to change the situation," said economist Hiroaki Muto at Sumitomo Life Insurance Co. "They may not be able to cover the largest, but they may be able to cover 20 million yen ($ 183 billion) of steps."
Additional spending could add to additional budgets worth more than 70 billion yen to address the virus and fund the economy over the past year.
The decline in the first quarter in investment signal companies is more cautious than previously expected. Although initial data is often widely reviewed, a group of business executives have begun to express concern about what they see as the unacceptable slow-release vaccine in one of the world's richest countries.
Nevertheless, strong exports and industrial production, backed by a global recovery, continue to provide a source of support for the Japanese economy, even though rising imports have caused the whole of GDP to decline in the first quarter.
Exports to Japan Rise Higher From 2017 amid Global Recovery
Consumers also did not lay off work as economists feared last quarter, a fact that could point to a repository of basic necessities that could help empower renewals once the borders were closed.
"Once the state of the virus becomes more prevalent and human activities become more normal, the need for resilience may arise," said Economy Minister Yasutoshi Nishimura. Japan is not targeting a major contract in the second quarter like last year and economic activity will expand as targets continue, he added.
But an increase in infection rates indicates that the government has not yet fully balanced its steps or has not adjusted its barriers quickly enough to address the challenges of new viruses as infection increases and the idea of hosting the Olympics is questioned. A survey by the Asahi Shimbun newspaper on Monday revealed that more than 80% of respondents were opposed to organizing the Games this year.
Until the beginning of the year, Japan was seen as an effective model of viral control, having achieved low rates of infection and death without full closure measures.
But a positive light has changed as the long-running vaccination approval process and its slow release have left the country far behind the U.S., the U.S. and other countries with powerful vaccination programs. To date, only about 3% of Japanese people have received even one dose.
"The best economic step is to accelerate vaccination," said Dai-Ichi Shinke. "While many other countries are considering easing restrictions, Japan is not yet in place."
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