Japan’s Economy Shrinks, but Outlook Is Brighter as Virus Ebbs

Japan’s economy continued to wobble in the third quarter of 2021, tipping back into contraction, as the country struggled to find its economic footing in the face of coronavirus restrictions and a supply chain crunch that hit its biggest manufacturers.

In the July-to-September period, the country’s economy, the third largest after the United States and China, shrank by an annualized rate of 3 percent, government data showed on Monday. The result, a quarterly drop of 0.8 percent, followed a slight expansion in the previous three-month period, when economic output grew at a revised annualized rate of 1.5 percent, or a quarterly rate of 0.4 percent.

But brighter days may be ahead, at least in the near term.

Japan now has one of the highest vaccination rates among major nations, and it has lifted virtually all restrictions on its economy as its virus caseload has fallen in recent weeks to one of the lowest levels in the world.

Seventy-five percent of the country is fully vaccinated. And coronavirus case counts have hovered in the low hundreds since mid-October, a decline of about 99 percent since their August peak, heralding the return of long-suppressed consumer spending.

Bolstering the positive outlook, policymakers, fresh off an election, are preparing a new round of stimulus that would provide support to ailing businesses and put cash in the hands of people nationwide.

The payments are likely to be more effective than previous ones, which went straight into people’s savings accounts, said Wakaba Kobayashi, an economist at the Daiwa Institute of Research in Tokyo.

“This time, people are less constrained; it’s become OK to go out,” she said, adding that “under these conditions, it’s easier to promote consumer spending.”

Even before the pandemic, Japan, with its aging population and waning business competitiveness, was struggling to achieve economic growth. After a growth spurt in the second half of last year, the economy has been stuck in a cycle of expansion and contraction, ebbing and flowing with the virus’s waves.

While other major economies have returned to life on the back of loosened restrictions, Japan has seemed unable to extricate itself from the virus-induced quagmire, the consequences of months spent struggling with the pandemic.

The country started the July-to-September period on the back foot because of a clunky vaccine rollout that left it far behind its peer countries.

By midsummer, it was in the midst of its toughest battle yet with the virus. The Delta variant caused cases to surge just as Tokyo prepared to kick off the Summer Olympics. Sponsors rolled back advertising campaigns, and tourists stayed home. The Games, which were conducted without spectators, failed to deliver the economic boost that had been promised when the country was chosen as host.

As the virus spread, Japan entered a new state of emergency. Restaurants and bars closed early and travel dried up, with many people deciding to stay home rather than brave record-high case counts.

At the same time, semiconductor shortages battered the country’s automakers, forcing many to drastically cut production. In September,…