Watch Economic Observatory / Will the decline in watch sales in Hong Kong be a positive for Japan?

The Hong Kong market, which has long reigned as the world's top export destination for Swiss watches and driven luxury watch consumption, is experiencing a downturn. The main cause is the large-scale protests against the proposed amendments to the Fugitive Offenders Ordinance, which intensified since June of this year, and even after the bill was withdrawn in September, the protests have shown no signs of abating. Leading economic journalist Tomoyuki Isoyama analyzes and considers the impact of the series of protests in Hong Kong on Japan's luxury watch market.

Will the decline in watch sales in Hong Kong benefit Japan?

　Ongoing protests in Hong Kong, a major market for luxury watches, have begun to cast a shadow over the economy. The protests were triggered by a proposed amendment to the Fugitive Offenders Ordinance, which would allow criminals to be extradited to mainland China, but the demonstrations have become more violent with each passing weekend. In one case, protesting students occupied the airport, causing flights to be canceled. The Chief Executive of Hong Kong withdrew the proposed amendment to the Fugitive Offenders Ordinance in September, but the protests show no signs of abating.

The impact of the prolonged protests on Hong Kong's economy

　The prolonged protests are beginning to have a serious impact on the Hong Kong economy. Hong Kong's gross domestic product (GDP) for the April-June period was down 0.4% from the previous quarter, and there is little prospect of recovery since July, when repeated airport closures occurred. It is certain that the July-September period will also see negative growth. With two consecutive quarters of negative growth, a recession is inevitable.

　The number of tourists visiting Hong Kong has plummeted due to airport closures and paralyzed city transport, dealing a major blow to the tourism industry, including accommodation, dining, and retail. The Hong Kong government announced on August 30 that the number of tourists visiting Hong Kong in July was 519 million, a 4.8% decrease from the same month last year. Retail sales in July fell 11.4%. A senior government official revealed that the number of tourists in August "fell by nearly 40%." The sharp decline in tourists visiting in search of duty-free goods is directly linked to a decline in sales of luxury goods.

　The impact on luxury watches has been particularly severe. According to statistics compiled by the Federation of the Swiss Watch Industry, Swiss watch exports to Hong Kong have been down year-on-year for five consecutive months since April. In particular, exports fell 26.8% year-on-year in June, when the protests intensified, causing Hong Kong, which had long been the top export destination for Switzerland, to be overtaken by the United States and fall to second place in June alone. Although exports recovered in July with a 1.3% decrease, they fell again significantly in August with a 12.7% drop, falling below exports to the United States.

　According to the association's statistics, cumulative figures for January to August show that exports to Hong Kong totaled 1,873.8 million Swiss francs (approximately 203 billion yen), down 6.4% from the same period last year. While exports to mainland China increased 14.0%, Japan increased 23.6%, and Singapore increased 11.9%, and while exports to Asia were all strong, Hong Kong's slowdown was noticeable.

Exports to Japan are increasing

　The main reason for the high growth in exports to Japan is thought to be dealers buying up inventory in anticipation of last-minute demand ahead of the consumption tax hike in October. In particular, the value of Swiss watch exports to Japan in August alone increased by 34.5% compared to the same month last year.

　However, this increase is likely due not only to last-minute demand, but also to a recent resurgence in Chinese visitors to Japan. According to statistics from the Japan National Tourism Organization (JNTO), the number of Chinese visitors to Japan, which had slowed to a 6.3% increase in April, has resumed double-digit growth since May. The overall number of visitors to Japan in August fell 2.2%, primarily due to a 48.0% year-on-year decline in visitors from South Korea, with which relations have deteriorated. Meanwhile, the number of Chinese visitors to Japan increased significantly, increasing 16.3%. While nearly half of Hong Kong's tourists were originally from mainland China, it is possible that Chinese people avoiding the protests and rising anti-China sentiment in Hong Kong are shifting their travel destination to Japan.

　According to trends in duty-free sales compiled by the Japan Department Stores Association, the number of customers who processed duty-free purchases at department stores nationwide in August was 381,000, a 7.1% decrease compared to the same month last year. This is thought to be due to a decrease in visitors from South Korea and other countries, but conversely, the amount spent per person who processed the purchases has risen sharply from 62,000 yen in June to 64,000 yen in July and 67,000 yen in August. The increase in the proportion of tourists from China, who tend to spend a lot on average, is thought to be strengthening the trend toward higher-priced items.

　Department store sales of "art, jewelry, and precious metals" in August were strong, increasing 23.8% compared to the same month last year. It appears that the rush of demand before the consumption tax increase, which had not been seen until now, has finally begun to appear. Growth can be expected in September as well.

　On the other hand, there are concerns about a rebound decline from October onwards, but purchases by Chinese tourists who will be exempt from the consumption tax hike due to the tax exemption procedures can be expected. Perhaps the decline in luxury watch sales in Hong Kong will lead to an increase in sales in Japan.