Japan Economy

Chart of the Week: Japan Machine Tool Orders

Japan machine tool orders is an old school business cycle indicator that we monitor closely at Saxo. It is not that popular nowadays, though it still highlights very interesting developments about the state of the economy, economic activity in Asia and where we are heading to. Since early 2018, orders have gone through a very sharp collapse, which is worse than during the 2015-16 China turmoil, as you can see in the below chart.

According to the preliminary report for January released a few days ago, orders are down for the 16th consecutive month, at minus 35.6% year-on-year to 80,775 million yen. The impact of the outbreak of the new COVID-19 coronavirus was still limited in January, so we expect orders will slide further in February and in March as the impact will be more visible.

Due to the epidemic, the US-China trade deal signed last month has not brought any relief to trade data and orders. As uncertainty remains regarding the exact economic cost of the ongoing crisis, Japanese machine tool makers are likely to rethink their own investment plans, postpone investment in China, and maybe cut jobs.

Contraction in orders also acts as a wake-up call for investors signaling that global growth is unlikely to rebound in Q1 this year, contrary to what the consensus forecasted at the end of 2019, and that they should be prepared for falling CAPEX.