My favorite old school business cycle indicator is collapsing at a level not seen since the GFC. Based on the preliminary report released this morning, Japan’s machine tool orders are out at minus 40.8% YoY in March vs minus 29.6% YoY in February. The drop is worse than during the China wobble of 2015-16 and is similar to that of 2009. Without much surprise, the hit in factory orders mostly reflects a significant decrease in foreign demand from Japan’s main trade partners while domestic demand actually improved slightly in March. The worst is yet to come as the world goes into shutdown. The April report will capture more accurately the exact impact of the COVID-19 on the business cycle. We expect that the amplitude of the slump in factory activity will certainly exceed that of the GFC when orders decreased by minus 85% YoY in March 2009. In coming months, the collapse in factory activity will translate into stagnant wages and incomes, both in the manufacturing and in the non-manufacturing sector, and also much lower capital investment. The final March report is due on April 28.
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