[Awakening Japan] ① Luxury Consumption Revived... Double-Digit Sales Surge at Japan's Top 5 Department Stores

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"Luxury consumption is increasing mainly among high-income groups. Japanese people, who experienced long-term deflation (a decline in prices during economic stagnation) in the past, tended to postpone consumption, but recently there has been a mood to consume luxury goods before their prices rise."

Japan is waking up from a deep slumber. Lee Ji-pyeong, a special professor at Hankuk University of Foreign Studies and an expert on Japan, recently focused on the changing consumption patterns in Japan. Professor Lee said, "Japanese consumers, who preferred to consume later, are now consuming in advance," adding, "It is a noteworthy change that high-income groups no longer postpone consumption but rather tend to buy ahead."

In addition to signs of recovery in Japanese consumption recently, the influx of foreign tourists is further revitalizing consumption. Foreign tourists are flocking to Japan, leveraging the historic low value of the yen, heating up the consumer market. In fact, since last month, group tours from China have resumed after three and a half years, causing a surge in luxury goods sales. According to the Nihon Keizai Shimbun, the sales of Japan's five major department stores in August increased by double digits compared to the same period last year. Hankyu Hanshin Department Stores (23.8%) and Mitsukoshi Isetan (21.1%) saw their August sales leap significantly year-on-year. On the Tokyo foreign exchange market, the yen-dollar exchange rate rose to 147.87 yen per dollar at one point during trading on the 8th. This is the highest level in 10 months since November last year and the highest this year. Although the Japanese government unusually intervened verbally to inject tension into the market, the yen's weakness has not stopped.

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Newly Opened Harry Potter Studio Facility in Tokyo, Japan
[Image Source=Yonhap News]

Visits by Korean tourists to Japan are also increasing. Namhoon Kim, a man in his 20s who recently purchased Nike sneakers and Diesel jeans during his trip to Japan, said, "Many models are not available domestically in Korea, and with the yen's weakness, I was able to save tens of thousands of won compared to buying directly from Korea," adding, "With the yen's value dropping, it felt like everything was duty-free, so I swept up all the items I wanted to buy." Soeun Park, a housewife with a 9-year-old child, said, "Following London in the UK, the Harry Potter Studio opened in Tokyo in June, the second in the world, and I plan to visit during the Chuseok holiday with my Harry Potter-obsessed child," adding, "The low yen reduced the travel burden."

This year, as Japan's consumption recovers following the declaration of COVID-19 endemic status, it is positively affecting the gross domestic product (GDP) growth rate. Due to the nature of Japan's economy, which has a large domestic demand component, the rapid recovery in consumption is helping achieve growth rates exceeding expectations. According to the Japanese Cabinet Office, Japan's real GDP (seasonally adjusted) in the second quarter (April to June) increased by 1.2% compared to the previous quarter, which is double South Korea's 0.6% GDP growth rate in the same period. Japan also grew 0.9% in the first quarter, surpassing South Korea's 0.3% growth rate, and if the current trend continues, South Korea's annual growth rate risks being overtaken by Japan for the first time in 25 years. This is the first time since the 1998 Asian financial crisis that South Korea's growth rate has lagged behind Japan's.

Professor Lee said, "Japan's economy recorded a real GDP growth rate of 0-1% from 2014 to 2020, but in the second quarter of 2023, it achieved an annualized growth rate of 4.8%," adding, "The three consecutive quarters of positive growth since the fourth quarter of last year are expected to continue this year, making it highly likely that South Korea's growth rate will be overtaken by Japan."

Japan's Wage Increase Rate at 3.58% This Year... Highest in 30 Years

In particular, the trend of Japan's consumer price and wage increases exceeding 3% indicates that deflationary pressures on the Japanese economy are retreating. According to the Bank of Korea's Tokyo office, the wage increase rate agreed upon in Japan's spring wage negotiations (Chuntou) this year was 3.58%, the highest level in 30 years since 1993. Fast Retailing, the parent company of Uniqlo, raised the monthly salary of new university graduates from 255,000 yen to 300,000 yen, and Nippon Life Insurance proposed a 7% wage increase for its 50,000 sales employees. The Japanese government, which has been stuck in deflation for a long time, is expecting a virtuous cycle of consumption expansion driven by rising prices and wages. Kim Taekyung, head of the Asia-Pacific Economic Team at the Bank of Korea, said, "The government is actively pursuing policies to raise middle-class wages to prevent consumption polarization and broaden the base of consumption."

Japan's consumer price inflation has steadily risen since last year, reaching the highest level in 42 years early this year, and the core inflation rate (excluding fresh food and energy) continues to rise. In August, Japan's consumer price inflation rate was 3.3%, exceeding the Bank of Japan's 2% target. Although the Bank of Japan maintains that temporary factors are at play, the consensus is that the possibility of prices falling back to zero or negative as in the past is low. Regarding future price outlooks, the Bank of Korea explained, "Whether demand-side inflationary pressures continue due to Japan's economic recovery this year will be an important factor for future price increases," adding, "Wage increases enhance consumers' purchasing power but can also cause price hikes due to rising costs, especially in service prices with a high labor cost component." Last year, supply factors such as rising international raw material prices and yen depreciation significantly contributed to inflation, but this year, demand factors are contributing more than supply factors, indicating signs of change in Japanese prices.

Seunghyun Kim, a senior researcher at the Korea Institute for International Economic Policy's Japan and East Asia team, said, "In July, spending on household durable goods and clothing, items closely related to daily life, increased for the first time in a long time, and indicators for face-to-face services such as dining out and entertainment improved due to tourism," adding, "Although consumption expenditure for households with two or more members is still down 5% year-on-year, wage increases have increased disposable household income, which could lead to future consumption growth, so it is time to closely watch Japan's changes."