Manufacturing recovery hinges on external demand

While October’s sales tax hike and Typhoon Hagibis were partly to blame for the sharp drop in manufacturing output in Q4, the bigger picture is that any recovery this year rests on a pick-up in external demand. Japanese industrial production fell in-tandem with German industrial output as global growth slowed last year. And given the similarity of their industrial structures – the importance of the automobile industry being an obvious parallel – external factors appear to be behind the recent slowdown in both countries. Unfortunately, the modest recovery hinted at by the more positive business survey data in January is likely to be nipped in the bud by disruption caused by the spread of the coronavirus. In all, continued manufacturing weakness should contribute to a contraction in Japan’s GDP in 2020.