Chinese tourists’ consumption in Japan has begun to wither in the face of a strengthening yen, setting up Hong Kong to recapture spending that has moved elsewhere in recent years.
Affordability is key
A country appeals more to foreign travelers as its currency weakens, making shopping and food more affordable than in other destinations. This is doubly true for Chinese travelers, who tend to spend heavily while abroad.
Such was the case for Japan from mid-2014 onward. The yen moved from the level of 16 to the yuan back then to between 19 and 20 in less than a year. Chinese tourism there more than doubled from the previous year to 4.99 million visitors in 2015, with per-visitor spending growing 20%.
Hong Kong was on the other side of the shift. Mainland visitors dropped 3% in 2015, while retail sales fell 3.7% in a second straight year of decline. Emperor Watch & Jewellery, a seller of luxury watches from such brands as Audemars Piguet and IWC Schaffhausen, reported a 25% drop in sales for the year ended Dec. 31. It blamed a “strong local currency” and an unfavorable tourism environment.
Chinese buyers’ spending in 2015 accounted only for around 1% of Japan’s retail market excluding such goods as automobiles and gasoline, Nomura International has calculated. That share was 50% in Hong Kong and 30% in Macau, exposing retailers dependent on mainland consumption to heavy damage as spending slipped away.
Trouble returns
Yet the landscape is shifting once again as the yuan weakens against the yen. 1 yuan now fetches around 16 yen, compared with 18 yen at the start of the year. Chinese tourists’ spending in Japan came in 10% below the year-earlier level for the January-March quarter. The total value of retail sales shrank 0.8% for April, Japan’s Ministry of Economy, Trade and Industry said Monday — a second straight month of year-on-year drops.
Retail sales in Hong Kong fell 9.8% for March, indicating improvement following February’s 20.6% tumble. Visitors from mainland China were still 6.9% below the year-earlier level. But overnight visitors declined only 0.8%, compared with a 20%-plus fall in February. Tourism from the mainland over the holidays surrounding Labor Day on May 1 swelled more than expected. While challenges continue, headwinds are gradually weakening.
Shifts in the Hong Kong dollar compared to the yen bolster this view. According to the Nikkei Currency Index, the Hong Kong dollar became stronger than the yen overall in September 2014, just as Chinese visitors’ so-called explosive buying of goods was taking off in Japan. The yen then continued to weaken while the Hong Kong dollar appreciated.
But the yen’s value hit bottom in May 2015, with the Japanese currency’s overall strength overtaking the Hong Kong dollar’s in April. The yuan, meanwhile, strengthened through the summer of 2015, only to weaken around 5% to its current level, the index shows.
Close to home
Changes in a locale’s exchange rate alter the affordability of goods there. An HSBC index tracking prices of 38 luxury items in various places compared with their home markets of France and Italy demonstrates this for top-of-the-line goods.
The Japanese market overall rated 121 on the index in February, with home-market prices serving as the baseline of 100. By mid-May, the figure had risen to 127. Hong Kong, meanwhile, has fallen from 119 to 116 over the past three months. The mainland-market figure has dipped slightly as well, from 137 in February to 135.
Chinese tourists will now feel less benefit from buying luxury brands in Japan as opposed to elsewhere. So while the Hong Kong figure has changed little in absolute terms, shopping here as compared with Japan has taken on fresh appeal, HSBC said. Some goods can even be found more cheaply here than in their home markets.
Bain & Co. sees Japan’s luxury goods market growing 5% in 2016 — the most among major countries. But a strengthening yen and shrinking Chinese tourism hint at a coming deceleration, according to the U.S. consulting firm.
Some 120 million Chinese headed abroad in 2015, plunking down more than $200 billion at their destinations. More detailed patterns of consumption will inevitably shift as the focus of spending turns from goods to services. But exchange rates will remain a key factor in these travelers’ buying power worldwide.
