MARGIN CALL FOR COMME?
What to expect from luxury players and consumers in the wake of Japan’s epic FX volatility.
Is Japan's luxury shopping spree winding down, or is it merely readying itself for further bargain hunters, bingers and bubbles? The yen’s recent yo-yo dynamics has sent markets in Japan and abroad whirlin’ and swirlin'. The currency has barfed big time and looks poised to be more dear going forward. What does that mean for luxury avant-gardians like Dover Street Market, brainchild of visionary Rei Kawakubo, and ritzy brands like LVMH and Hermès, who have been juggernauts of the Japanese fashion trade? Will the volatile yen eat into margins and make Japan an arbitrage meca for art and fashion, or will the land of the rising sun fizzle out?
In early July, the yen tumbled to its lowest level against the dollar since 1986, sparking a feeding frenzy among art collectors, dealers, and luxury clients. Armed with dearer dollars and euros, these opportunists flocked to Japan, eager to snap up deals priced at a discount.
But this rush wasn't limited to just Western value seekers. Visitors from all over Asia, particularly China and South Korea, joined the frenzy to snatch up goodies from Yohji , Comme, Noire and more. According to the Japanese Tourism Agency, foreign tourist spending between April and June hit a record 2.1 trillion yen, with Chinese visitors accounting for nearly 21% of that total. The government now expects foreign tourist spending to reach an unprecedented 8 trillion yen this year.
Kazuo Ueda, the big daddy at the helm of Japan’s monetary policy, recently stepped in to curb the yen's slide against the dollar, raising the key interest rate to around 0.25%, up from a range of zero to 0.1%. This seemingly modest shift sent ripples across the economy, forcing yen borrowers to either shutter their operations or scramble to restructure debt obligations as borrowing costs rose.
Historically, luxury companies have hedged their pricing in response to significant and prolonged currency fluctuations. From Kering and LVMH to Hermès and Chanel, cautious measures and price tweaks were already in the making, keeping Japan’s luxury market more affordable than China’s, where taxes and FX fluctuations are more cumbersme.
Whether Japan continues to be a magnet for luxury shoppers—and whether the rosy projections hold—will depend on how consumers and investors react to future rate shocks from the Bank of Japan. Will they tighten their belts, or will they keep splurging on luxury goods abroad? As currency volatility intensifies, uncertain consumers and policy makers could get caught up in a doom loop.
