Watch Economic Observatory: Will the simultaneous occurrence of inflation and the financial crisis boost demand for luxury watches?

Just as the so-called "COVID-4 pandemic" is beginning to subside around the world and people are beginning to move around more, financial uncertainty stemming from a Silicon Valley bank in the United States is shaking the Western economies. With the replacement of the Bank of Japan governor looming in April, attention is focused on the future of monetary policy in Japan. Leading economic journalist Tomoyuki Isoyama analyzes and considers the increasingly uncertain global and Japanese economies, as well as the "clock economy," in 2023.

Will the simultaneous occurrence of inflation and the financial crisis boost demand for luxury watches?

　Two mid-sized US banks, Silicon Valley Bank (SVB), ranked 16th in total assets in the US, and Signature Bank, ranked 29th, have both gone bankrupt. Furthermore, in Europe, Credit Suisse, the second largest international financial institution in Switzerland, is facing a management crisis and has been acquired and rescued by the country's largest bank, UBS. Concerns are swirling that a financial system crisis similar to the Lehman Shock could hit the world.

　The main reason why mid-sized US banks were forced into bankruptcy was the reversal of global financial trends. The Federal Reserve (FRB) reviewed the drastic monetary easing that had been continued in order to weather the unprecedented economic crisis caused by the COVID-19 pandemic and began to significantly raise interest rates, which completely changed the global situation of "surplus money."

　The background to this is that the United States was hit by rampant inflation as a result of the excessive supply of funds. The Federal Reserve has repeatedly raised the policy interest rate, which had been at 0.25% until early 2022. As a side effect, weaker banks have been forced to go bankrupt. In fact, the Federal Reserve raised the policy interest rate by 0.25% in March after the two banks went bankrupt, raising the target rate from 4.75% to 5.0%. Although the rate of price increase has slowed somewhat, inflation has not yet subsided, so the Federal Reserve has not changed its stance of curbing inflation.

Swiss watch exports grow thanks to inflation

　According to the Federation of the Swiss Watch Industry's Swiss watch export statistics, which serve as an indicator of trends in luxury watches, cumulative exports to the United States for January and February 2023 totaled 664.9 million Swiss francs (approximately 95 billion yen), up 20.5% compared to the cumulative total for January and February of the previous year. This high growth rate indicates that American consumption is still overheating. Raising interest rates would normally result in a significant drop in stock prices, but the New York Dow has fluctuated, remaining around $32,000. The lingering effects of excess liquidity remain, suggesting that consumption is unlikely to suddenly cool down.

　Furthermore, the rampant inflation is also a driving force behind the consumption of luxury watches. Inflation means that the value of currency falls, so holding deteriorating currency effectively reduces the value of your assets. There is a continuing trend to shift wealth away from currency and toward "real assets" such as real estate and high-end jewelry, and luxury watches are one such example of this.

　According to the Federation of the Swiss Watch Industry's February export statistics by price range, exports in the 200 to 500 Swiss franc price range (28,500 to 71,000 yen in Japanese yen) fell by 18.9%, while exports under 200 Swiss francs and over 500 Swiss francs saw double-digit growth, highlighting a clear polarization. Of these, luxury watches priced over 3000 Swiss francs (430,000 yen) increased by 13.7%. In other words, expensive luxury watches continue to sell.

　Exports to the world in January and February increased 10.6% compared to the same period last year. Exports to 26 of the 30 major countries exceeded the previous year's figures, suggesting that the impact of increased consumption is still continuing worldwide. Exports to mainland China, which were down year-on-year in January, turned positive in February.

Meanwhile, exports to Japan are slowing

　One area of ​​concern is Japan. Cumulative exports to Japan for January and February rose only 3.4%. The yen's rapid depreciation at one point last year led to a surge in demand for goods before yen-denominated prices rose, as well as a shift to physical assets due to concerns about Japan's declining national power and the yen's credibility. It's no secret that department store precious metals departments and luxury brand shops were booming.

　However, perhaps due to a pause in the yen's depreciation, the growth of exports to Japan has slowed. With the change in the Bank of Japan governor coming up, there may be growing interest in assessing the future of the Japanese economy. If interest rates were to rise in Japan (and government bond prices to fall), there are concerns that the financial health of regional banks and other institutions would deteriorate. Meanwhile, there are those who are hopeful of a full-scale increase in inbound demand, and views on the future are mixed.

Tomoyuki Isoyama
Economic journalist and professor at Chiba University of Commerce. Born in Tokyo in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Inc. as a securities reporter, deputy chief of the same department, Zurich bureau chief, Frankfurt bureau chief, and deputy editor-in-chief and editorial committee member for Nikkei Business. Left the company in 2011 to go independent. Covers a wide range of political, government, and business figures. His books include "The International Accounting Standards War: Final Chapter" and "The Secrets of Switzerland, the Brand Kingdom" (both published by Nikkei BP).
http://www.isoyamatomoyuki.com/