(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.Japan’s economy shrank more than expected during the first three months of the year, raising the possibility of a double-dip recession as the country struggles to contain infections and speed up its vaccine rollout.Gross domestic product contracted an annualized 5.1% from the previous quarter, ending six months of double-digit growth, as businesses cut investment, shoppers held back spending and government outlays fell amid a suspension of a travel-promotion campaign to help the ailing tourism industry.Economists had forecast an overall contraction of 4.5%.The worse-than-expected result leaves the economy in a vulnerable position this quarter, as Prime Minister Yoshihide Suga’s administration struggles to find the right balance in a targeted approach to virus containment that attempts to limit damage to the economy and keep the staging of the Olympics on track.“If the state of emergency is extended, that will certainly raise the odds of a contraction,” said economist Yoshiki Shinke at Dai-Ichi Life Research Institute. “Consumer spending is the biggest missing piece for the economy and it’s hard to predict because it’s very much dependent on the virus situation.”Suga last week added three more prefectures to the latest emergency, putting about half of the economy under restrictions that are slightly tighter than the ones in winter, but still less draconian than Europe’s lockdowns. Restaurants and bars in the biggest cities are now being asked to refrain from serving alcohol in addition to closing early.Failure to end the restrictions at the end of May and to avoid a slip back into recession would pile pressure on Suga to take extra action to right the economy and maintain his hopes of surviving as premier as the country heads into a general election that must be held by the autumn.Inability to peg back infections could also fuel concern over the staging of the Tokyo Olympics. Canceling the Games would deal another blow to the economy.What Bloomberg’s Economist Says...“In the details of Japan’s deeper-than-expected GDP contraction in 1Q, there was even more bad news -- a surprise drop in private investment and an unexpectedly steep buildup in inventories. These signal weakness in the manufacturing sector -- a rare growth driver amid the virus emergency -- and add to downside risks to the economy in 2Q.--Yuki Masujima, economistTo read the full report, click here.“The government may end up putting together an extra budget to change the situation,” said economist Hiroaki Muto at Sumitomo Life Insurance Co. “They may not be able to compile a big one, but they might pull together about 20 trillion yen ($183 billion) of measures.”Additional spending would add to extra budgets worth over 70 trillion yen to deal with the virus and support the economy last year.The first quarter drop in capital investment signals companies are more cautious about the outlook than earlier expected. Though the preliminary data is often heavily revised, a chorus of business executives have started to voice concern over what they see as an unacceptably slow vaccine rollout in one of the world’s richest countries.Still, strong exports and industrial production, supported by the global recovery, continue to provide a bedrock of support for Japan’s economy, even though a rise in imports caused the overall trade component of the GDP to go negative in the first quarter.Japan’s Exports Jump Most Since 2017 Amid Global Trade RecoveryConsumers also didn’t retrench as much as economists feared last quarter, a fact that may signal a reservoir of underlying demand that could help power the recovery once restrictions are removed.“Once the virus situation starts to be more contained and people’s activity becomes more normalized, pent-up demand is likely to emerge,” economy minister Yasutoshi Nishimura said. Japan isn’t heading toward a big contraction in the second quarter like last year and economic activity will broaden out as vaccinations proceed, he added.But rising infection numbers indicate the government still hasn’t got the balance of its measures right or hasn’t adjusted its restrictions quickly enough to account for new virus strains as infections rise and the logic of holding the Olympics is called into question. An Asahi Shimbun newspaper poll on Monday showed more than 80% of respondents were against staging the Games this year.Until earlier this year, Japan was seen a relatively successful example of virus control, having achieved low infection rates and deaths without full lockdown measures.But the positive optics have changed as the country’s lengthy vaccine approval process and its slow rollout have left the country well behind the U.S, the U.K. and other countries with more aggressive inoculation programs. So far, only about 3% Japan’s the population has received even a single dose.“The best economic measure is to accelerate vaccination,” said Dai-Ichi’s Shinke. “While many other countries consider loosening restrictions, Japan isn’t there yet.”(Updates with economist’s comments on possibility of more government stimulus.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.