Japan’s Yo-Yoing Economy Shrinks as Virus Spreads and Vaccinations Lag

Japan’s economy shrank in the first three months of 2021, continuing a swing between growth and contraction as its plodding vaccination campaign threatened to stall its recovery from the pandemic even as other major economies appeared primed for rapid growth.

In the year or so since the coronavirus emerged, Japan’s domestic demand has experienced cycles of shrinkage and expansion, as coronavirus cases have risen and consumers have retreated indoors, and as infections have then dropped and businesses have welcomed customers back.

Currently, Japan is suffering a resurgence in virus cases, with much of the country under a state of emergency and deaths climbing, especially in Osaka. The yo-yoing economic pattern, analysts said, is unlikely to stop until the country has vaccinated a significant portion of its population, an effort that has just begun and seems unlikely to speed up significantly in the coming months.

That dynamic could potentially push the country back into recession — defined as two consecutive quarters of contraction — later this year, as it struggles to check the spread of deadlier and more contagious coronavirus variants.

Japan’s economy, the world’s third largest after the United States and China, shrank 1.3 percent during the January-to-March period, for an annualized drop of 5.1 percent. The contraction followed two consecutive quarters of expansion.

Growth rocketed in the second half of last year as consumers, who had spent months holed up at home to avoid the virus, piled into department stores, restaurants, bars and theaters.

The rebound went a long way toward digging the economy out of the huge hole produced by the early months of the pandemic. But, as the new data show, the turnaround is fragile and will be hard to maintain as long as the country continues to face the threat of the virus.

“We’re in a situation where we can’t relax until the vaccine has become well distributed,” said Keiji Kanda, a senior economist at the Daiwa Institute of Research in Tokyo.

In early 2020, when the pandemic hit, Japan’s economy was already battling headwinds from slackening demand from China, a rise in the consumption tax and a devastating typhoon. When the country went on an emergency footing that spring, domestic consumption cratered and exports dropped to new lows.

The result was the largest blow to the economy since 1955, when the country first began to use gross domestic product to measure its growth.

Even so, the pandemic’s effects on Japan have been relatively mild compared with the havoc wreaked on the United States and many European countries. Japan has never gone on full lockdown, and total deaths remain under 12,000.

Those factors, combined with — by some standards — the world’s largest stimulus measures, have kept the country’s unemployment rate low and have propped up many small businesses such as restaurants and hotels.

While Japan’s pandemic response has managed to blunt the worst of the economic damage, recovery will continue to be an uphill battle, said Tomohiro Ota, a senior economist at Goldman Sachs in Japan.

Trade has rebounded in recent months as some countries have reopened, but “without a consumption recovery, we cannot go back to the pre-Covid days,” he said.

Progress toward that goal has been a matter of taking two steps forward and one back. Consumption at home has come in waves, cresting and receding as case numbers wax and wane.

Japan’s state of emergency last spring devastated domestic demand as people bunkered down at home. Consumption bounced back briefly over the summer and fall. A second state of emergency, in January, was followed by a similar rebound.

Last month, the authorities moved the country onto an emergency footing for the third time, seeking to check the spread of the coronavirus ahead of the Olympics, which are set to begin in Tokyo at the end of July.

The latest round of restrictions encompasses only parts of the country, but includes its major metropolitan areas, such as Tokyo and Osaka, and is stricter than the one before. Previous iterations focused on shortening the hours of bars and restaurants. But in this version, officials have for the first time requested that department stores cut back on most services and that eateries stop serving alcohol.

The economic impact of the measures will depend on the reaction of a public that has already grown weary of staying home, said Taro Saito, an executive research fellow at the NLI Research Institute in Tokyo.

“We can’t say with certainty that there will be a contraction in the April-to-June period” as a result of the restrictions, he said. But “if the targeted areas expand, that could put downward pressure on growth. The situation is very fluid.”

The stop-and-go pattern looks set to repeat itself for sometime yet, said Izumi Devalier, the chief Japan economist at Bank of America Merrill Lynch.

“The domestic economy continues to be whiplashed by developments around the virus,” Ms. Devalier said, adding that vaccinations remained the key to improving domestic demand.

Japan’s vaccine rollout has been among the slowest among major developed nations. The authorities have approved the use of only one vaccine, the shot made by Pfizer and BioNTech, and strict rules requiring that inoculations be carried out by doctors and nurses have slowed distribution. Just over 3 percent of the country has received a first shot, and vaccines are unlikely to be made available to the general population until the end of this summer at the earliest.

“Japan, compared to where other countries stood at this point in their vaccination programs, is way behind,” Ms. Devalier said, adding that the slow progress “simply delays recovery.”

Mr. Kanda, of the Daiwa Institute of Research, said that “if vaccination makes good progress, economic activity can basically restart from the fall of this year.”

But, he added, “if the current slack pace continues, we could see another explosion in infections.”