By Sabrina Escobar
Japan is still the land of rising fortunes for luxury-goods companies, even as trendsetters elsewhere have pulled back on purchases of expensive designer goods. Analysts say the outlook for Japanese domestic demand is as promising as it has been in years, due to gains in real wages and a strong stock market, which have encouraged spending.
The Japanese luxury market got a boost earlier this year from a weakening yen and hordes of Chinese tourists, although both trends have since reversed. LVMH Moët Hennessy Louis Vuitton blamed a 2% decline in third-quarter revenue on "lower growth seen in Japan," while rival Kering called out Japan in particular, and the Asia-Pacific region generally, for "the bulk of" its sales slowdown in the period.
Yet, the domestic market is poised to pick up the slack, which could mean a steady stream of revenue as luxury companies figure out how to recharge business in other key markets. "Japan, being a major market, slowed down a little bit from the end of July, but is still a great place to be," said Andrea Guerra, CEO of Prada.
Luxury Hot Spot
Japan has long been a luxury hot spot in East Asia. Tokyo had more designer stores last year than any other city in the world, according to the luxury travel agency Lartisien. And that isn't counting the secondhand luxury shops that have popped up in response to growing demand for sustainable fashion from younger generations.
The yen's devaluation against other currencies in the first half of 2024 made the market even more attractive, especially for designer-loving Chinese consumers battling economic malaise at home. Savvy shoppers saw their budgets stretch further in Japan, due to favorable currency conversion. For example, a Louis Vuitton "Zippy" wallet retailed for 114,400 yen, or about $780, on Louis Vuitton's Japan website in mid-July. The same item cost $865 in the U.S., and about $970 in China on the same day.
The number of Chinese tourists in Japan surged almost 230% from January through September, according to the Japan National Tourism Organization. That translated into a revenue boost for luxury firms with a large presence in Japan. LVMH and Kering saw Japanese sales rise by 57% and 22%, respectively, in constant currency in the second quarter ended in June.
Japan's share of luxury revenue also increased; sales in Japan accounted for 9% of the total for LVMH, up from 7% a year earlier.
The tourist boom has slowed this fall, partly because of the yen's appreciation in the third quarter, which made exchange rates less favorable again. Japan's central bank recently raised its benchmark interest rate by a quarter of a percentage point from near-zero, and Bank of Japan Gov. Kazuo Ueda said in a rare statement that the rate hike was partly motivated by a desire to strengthen the yen. The Japanese currency has since fallen back toward the lows of early July, but the messaging about the yen's rise may have dissuaded potential visitors.
Meanwhile, luxury-goods companies have raised prices to compensate for the losses they took when converting yen sales to euros. Hermès, for example, recorded a negative impact of 100 million euros ($108 million) to revenue in its fiscal second quarter due to unfavorable exchange rates largely tied to the yen's depreciation.
While higher prices help to offset currency and other losses, they can also alienate prospective buyers. That was the case in the U.S., where companies hiked prices aggressively during the pandemic. Prices in Japan have been kept relatively low to avoid spooking Japanese customers, but that is changing now. "The price gap between Japan and other markets is gradually becoming less attractive," said Armelle Poulou, Kering's chief financial officer, on a call with investors in October.
What's Next for Japan?
That might not matter to Japanese buyers, however. The country was home to three million millionaires in 2023, and its millionaire population ranked No. 5 in the world, according to UBS' Global Wealth Report. The bank expects the number of millionaires to rise by 28% by 2028.
These high-net-worth shoppers provide a customer base for luxury brands that local experts say is worth keeping happy. "Japanese consumers [are] very difficult to capture as a customer, but once you do, they're incredibly loyal, probably the most loyal customers in the world," said Timothy Connor, CEO of Synnovate, a retail consulting firm based in Japan. "They will consistently purchase season after season, from those stores, from those brands."
Japan's appetite for high-end shopping is apparent in local retail-sales data. Department-store sales -- often seen as a proxy for luxury consumption -- have notched 31 consecutive months of growth, according to Japan's Department Stores Association. Hermès thanked the "loyalty of its local clients" for driving up sales in Japan by 23% year over year in constant currency in its fiscal third quarter, which followed nine consecutive quarters of sales growth exceeding 20%.
Kering also said that underlying demand from Japanese customers had improved slightly in the third quarter from the second, even as tourist-driven sales growth decelerated.
The Japanese stock market's rebound has helped to encourage high-end purchases in recent years. The benchmark Nikkei 225 has gained 70% in the past five years, and about 15% this year, posting its first new high since 1989. The index is heavily weighted toward companies such as Toyota Motor and Sony Group, whose profits rise when overseas earnings are boosted by a weaker yen.
To be sure, the Bank of Japan's decision to raise interest rates could temper future gains, just as the yen's most recent appreciation could dent shareholder returns. There are also lingering concerns about the broader health of the Japanese economy, which stagnated for decades -- and lately, about rising prices.
Frustrations about the economy recently cost the long-ruling Liberal Democratic Party its governing majority for the first time in more than a decade. The election results probably will have implications for Japan's economic trajectory, including the potential for more pushback against the central bank's rate-tightening moves.
But the Japanese stock market still has room to run, which should keep the country's wealthy citizens spending. The median year-end 2025 target price for the Nikkei 225 was recently JPY46,086, according to estimates tracked by FactSet, implying a 20% return from recent levels.
"We expect the high-income households' consumption activities are likely to stay firm, driven by rising wages and wealth effects," wrote Norihiro Yamaguchi, senior Japan economist at Oxford Economics, in an email to Barron's.
Lately, there are signs that consumer demand is improving more broadly. Japan's third-quarter gross-domestic-product report showed that spending rose 3.6% year over year as real wages increased. If the yen were to strengthen again, domestic purchasing power would get an extra boost, potentially opening up the luxury market to slightly less affluent Japanese customers.
Japan may not be a panacea for luxury companies' global woes. But the local market has proved resilient, and remains a bright spot for an industry in need of more customers and good news.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 20, 2024 03:00 ET (08:00 GMT)
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