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In Japan, Luxury Flourishes While Economy Flounders

Japan’s economy is dipping in and out of recession, but the country is still one of the bright spots in the global luxury goods market. BoF reports.
Ginza shopping district in Tokyo | Source: Shutterstock
  • Kate Abnett

LONDON, United Kingdom — Japan's economy is struggling. Despite the efforts of prime minister Shinzo Abe, in 2015, Japan's economy grew at an anaemic rate of 1 to 1.5 percent, according to data provided by the World Economic Forum.

Since the global financial crisis, Japan, the world’s third-largest economy, has fallen into recession three times. In November, household spending fell for the third month in a row. And more turbulence came in January, when Japan’s central bank shocked world markets by adopting negative interest rates, in a bid to dodge deflation by forcing more borrowing and boost Japan’s export-sensitive economy by weakening the yen.

And yet, for the past few years, Japan has been a consistent champion in the global market for luxury goods. In 2015, Japan was the second-largest luxury goods market in the world, worth €20 billion (about $22.7 billion), according to data provided by consulting firm Bain & Company. In 2015, the nation’s luxury goods market grew 13 percent at current exchange rates (9 percent at constant exchange rates).

In the year ended 31 December 2015, LVMH sales in Japan jumped 13 percent, outperforming the conglomerate's sales growth in Europe and the US, as well as the rest of Asia, where sales fell 5 percent. For the same period, Salvatore Ferragamo's revenues in Japan increased by 14 percent, while Hermès' Japan sales grew 19 percent.


So, if Japan’s economy is floundering, why are luxury brands performing so well?

At first glance, this seems like a contradictory situation. But one reason for this discrepancy is simple: tourists. Driven by the weak yen, the downturn in tourism in Hong Kong and Macau, and relaxed visa rules for Chinese citizens which came into effect last January, the number of Chinese tourists visiting Japan is rocketing. This influx has boosted Japan’s decades-long track record as an island of stability and spending power in the global luxury market.

Last year, 19.7 million overseas tourists landed in Japan, according to the Japan National Tourism Organisation. About 5 million were from China — an increase of over 100 percent on the previous year. And they came to shop: of the record-breaking ¥3.48 trillion (about $31 billion) spent by foreign visitors in Japan last year, Chinese people accounted for 40.8 percent. “Since the devaluation of the yen together with the appreciation of the Chinese yuan, it’s very convenient and cheaper to buy luxury goods in Japan rather than in Mainland China,” says Federica Levato, senior consultant at Bain & Company.

Indeed, in Japan — where an ageing, shrinking population is the source of many of the economy’s woes — tourists are buoying luxury brands. Tourists represent up to 40 percent of total sales in Japan for most exposed brands, according to Bain’s 2015 global luxury goods report. In January, tourist flows also tempered weak domestic sales at Japanese retailers, including department store Takashimaya, where a warm start to the year hurt winter clothing sales.

“Japan has been quite exceptional in becoming a tourism destination for the Chinese,” says Michele Norsa, chief executive officer of Salvatore Ferragamo, who says tourist flows to the country have “changed quite dramatically” in the last 15 months. “You need to have fresh young blood, and this comes from the tourists,” he adds.

However, economic turbulence in China could impact the flow of Chinese tourists to Japan — especially if the yen continues to appreciate and the Chinese yuan continues to drop, making buying luxury goods in Japan less of a bargain for Chinese shoppers, says Levato from Bain. “We don’t think that without any other government measures the yen will change dramatically. But it might be that the local government would want to move again,” she adds.

Mizuyo Yoshida, president of Japanese PR agency Steady Study, adds that most Chinese tourists and luxury goods customers belong to the wealthy classes and will not be affected by the nation's economic slowdown. "There will not be much difference, and the position of those luxury brands in the Japanese market will [not] change," she says.

While Chinese tourists have buoyed the market in recent years, Japan has been a powerful and consistent market for luxury goods as far back as the 1960s when a post-war industrial boom cemented the country's position as the original Asian luxury mecca. "Virtually all luxury brands have a formidable presence in Japan," according to Luxury Goods in Japan, a 2013 report by McKinsey & Company. "Japanese consumers remain some of the most discerning, loyal and important luxury customers in the world."


Although Japan has not been nearly as dynamic as China over the past decade, the country has remained an island of stability in the face of turbulent global markets, with consistently impressive spending power. According to the New World Wealth APAC Wealth Forecast, in 2015, Japan had 1,260,000 high net worth individuals (individuals with net assets of $1 million or more), more than twice as many as China (654,000). And despite its ageing population, Japan will gain 327,600 HNWIs from 2015 to 2025 — more than any country in Asia Pacific except China (490,500).

Today, most major luxury brands are consolidating — rather than expanding — their Japanese footprint. This year, Ferragamo, which has 81 points of sale in Japan (of 662 worldwide), will make its biggest ever capital expenditure investment in the country, to renovate existing stores and consolidate some department store spaces into larger spaces.

In spite of recent signs to the contrary, there are some signs that an uptick in Japan’s domestic economy may be on the way. Japan’s government predicts that the country’s economy will grow about 1.7 percent in real terms in the fiscal year beginning April 2016, led by recovering consumer spending and solid capital investment.

As to whether the Bank of Japan's decision to slash interest rates to negative will impact the luxury sector, Akiko Shinoda, director of international affairs for Japan Fashion Week, says, "Categories like watches or jewellery would be affected badly because of super-rich people who [were] enjoying to make money on the stock market. But [on] normal fashion luxury, [it] would have almost no impact."

Looking further forwards, the 2020 Olympics in Tokyo may be another boon to the luxury industry, spurring investment in retail infrastructure including new shopping centres and department stores, “More space and better space,” predicts Levato from Bain.

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