Watch Economic Observatory / Will there be a surge in "last-minute demand" before the consumption tax increase?

Will there be a surge in "last-minute demand" before the consumption tax hike?

The luxury watch and jewelry industry boomed during the last consumption tax hike, fueled by last-minute demand. However, with the next tax hike looming, there is still a sense of uncertainty. The watch industry will be hit harder than other industries by the tax hike. Leading economic journalist Tomoyuki Isoyama offers some guidance for those concerned, even amidst the uncertainty.

　There are four months left until the consumption tax increase on October 1, 2019. With the tax rate set to rise from 8% to 10%, excluding some items subject to reduced tax rates, a rush of demand is expected, particularly for expensive items such as jewelry and luxury watches.

　When the consumption tax rate was raised from 5% to 8% in April 2014, sales increased significantly starting about six months before the tax hike, and by March, just before the increase, sales were so strong that it was said the display cases were empty. For example, according to the Japan Department Stores Association, the year-on-year growth rate for the "Art, Jewelry, and Precious Metals" sector of nationwide department store sales showed strong growth from 19.7% in October 2013 (six months prior) to 21.0% in November and 15.5% in December. Three months prior, in January 2014, sales increased by 22.6%, in February to 24.5%, and in March, just before the increase, they surged to 113.7%, or 2.14 times.

　If you buy a watch that costs 100 million yen before tax, the difference in consumption tax alone will be 3 yen, so people rushed to buy it.

　This time, the tax increase is only 2%, so the impact is smaller than last time, but it still makes a difference of 20,000 yen for a million yen purchase. Naturally, if you have 10 million yen, it will be 200,000 yen more expensive, so for wealthy people who have things they want, it will be a big incentive to make purchases.

　Will there really be another big boom in people rushing to buy things before the tax increase?

　According to the Swiss Watch Federation's export figures by country/region for March 2019, exports to Japan totaled 137.1 million Swiss francs (approximately 149 billion yen), a 21.8% increase compared to the same month of the previous year, placing Japan fourth after Hong Kong, the United States, and China. While China saw a 17.3% increase to 141.6 million Swiss francs, Japan's growth rate surpassed that of China, and the value was also very close.

　The UK, in fifth place, saw a 76.4% increase to 134.7 million Swiss francs, rapidly catching up with Japan. This is thought to be due to dealers suddenly increasing their inventory in preparation for the Brexit deadline at the end of March. The Federation of the Swiss Watch Industry also points out that this is a "special case due to Brexit."

　So how should we interpret the 21.8% increase in exports to Japan? It is unlikely to be due to a sudden recovery in Japanese consumption. It is more likely that dealers have increased their inventory in anticipation of a repeat of the "last-minute rush." ​​After all, the most recent sales figures were more than double the average year-on-year. Without goods, there is no business.

　However, consumption has not picked up much recently. With just six months until the tax increase, department stores' sales in the "art, jewelry, and precious metals" category in April of this year increased by 8.8% compared to the same month last year, falling short of the 19.7% increase recorded six months ago.

　It is understandable that the growth rate is low for automobiles and other products, as tax cuts are being provided after the tax increase as a measure to counter the reactionary decline. However, since there are no such benefits for high-priced items, one would think that there would be a surge in last-minute demand.

　The reason why there has been so little rush to apply may be because many people are skeptical about whether the tax increase will actually take place.

　The Cabinet Office released preliminary figures for its March Index of Economic Sentiment (CI) on May 13, showing that the "coincident index," which indicates the current state of the economy with 2015 as the base year and 2016 as the base year, was 99.6, down 0.9 points from the previous month. The basic assessment, which is mechanically determined based on the index's trends, was "deteriorating" for the first time in six years and two months since January 2013. Furthermore, while gross domestic product (GDP) figures for January through March, released on May 20, showed a positive growth, imports fell and consumption remained noticeably weak, making the economic slowdown clear. With the July House of Councillors election approaching, speculation is beginning to emerge in political circles that Prime Minister Shinzō may once again postpone his consumption tax hike.

　Watches and precious metals can usually be purchased on the spot, so unlike houses and cars, there is no need to prepare early in anticipation of the tax increase. You can simply buy them at a shop the day before. It is likely that once the tax increase is officially decided, a rush of demand will suddenly surface.