Japan's inflation targeting policy has made slow progress since the Bank of Japan decided to introduce an inflation target of 2% as the price stability target at its monetary policy meeting on January 22, 2013. However, domestic prices have been pushed up by import inflation caused by the COVID-19 pandemic and the war in Ukraine sparked by Russia, and the consumer price index in April 2022 rose to 2.1% year-on-year, excluding fresh food. Lagging behind the rest of the world, concerns about an economic recession due to inflation are rapidly growing in Japan as well.
With the global economy slowing, what will happen to the luxury watch market in Japan and around the world? Leading economic journalist Tomoyuki Isoyama analyzes and considers the current situation and outlook.
Text by Tomoyuki Isoyama
Reuters/Aflo: Photo
Photograph by REUTERS/AFLO
Japan is lagging behind the rest of the world in inflation.
Low interest rates and a weak yen have led to high demand for "real assets" (luxury watches)
Concerns are growing about a slowdown in the global economy. According to the World Bank's "World Economic Prospects" released on June 6, the economic growth rate (real GDP growth rate) in 2023 will be 2.1%, slowing from 3.1% in the previous year.
The report predicts a slowdown in the US economy, which has been experiencing rapid interest rate hikes to curb rampant inflation, and predicts that growth will suddenly slow to 1.1% in 2023 and 0.8% in 2024. Given that the US economic growth rate was 5.9% in 2021 and 21% in 2022, this could be described as a sudden slowdown.
In the eurozone, where inflation remains unabated, there are strong concerns that interest rate cuts will slow the economy. Growth rates were high, at 5.4% in 21 and 3.5% in 22, but are expected to fall to 0.4% in 23.
US and UK raise interest rates despite growing concerns about a global economic slowdown
Normally, when concerns about an economic recession grow, interest rates would be lowered, but neither the US nor the UK shows any signs of easing interest rate hikes, as their central banks see strong upward pressure on prices.
The US Federal Reserve Board (FRB) held its Federal Open Market Committee (FOMC) meeting on June 13-14 and left the target for the federal funds rate unchanged. This was the first time that interest rates had been left unchanged since January 2022, and there were hopes that the rapid pace of interest rate hikes would come to an end, but with inflation forecasts revised upward, there is a growing view that interest rates will be raised again before the end of the year.
Meanwhile, there are strong concerns about a slowdown in the Chinese economy, which, along with the United States, has been driving the global economy. The World Bank projects a growth rate of 5.6% for 2023, a recovery from 3.0% in 2022, but there are many reasons for concern. The National Bureau of Statistics announced that the youth unemployment rate in April exceeded 20%, a new record low, and some are saying that the actual state of the economy cannot be viewed optimistically. In June, the People's Bank of China lowered its prime lending rate for the first time in 10 months, suggesting that the authorities are also concerned about an economic downturn.
Swiss watch exports remain strong in the first half of the year
Amid this, the focus is on the future of global demand for luxury goods, which has continued to be strong. The value of Swiss watch exports to the world, as compiled by the Federation of the Swiss Watch Industry (FH), hit record highs in both 2021 and 2022. As continued high inflation rates lead to a decline in the value of currencies, demand has been boosted by a shift to "real assets" such as precious metals, jewelry, luxury watches, and real estate. Furthermore, with the resurgence of travel, which had come to a halt due to the spread of COVID-19, purchases of luxury watches at travel destinations have also rebounded sharply.
Amid concerns about a slowdown in the global economy, will investment in these "real assets" cool down? Looking at the cumulative export value of Swiss watches from January to May, it was 11.3% higher than the same period last year. This is roughly the same as the annual growth rate for 2022, and there are no signs of a sudden drop yet. Much of the decline will likely depend on how severe the U.S. and Chinese economies are in the second half of this year.
Inflationary pressures intensify in Japan
The Bank of Japan will continue its low interest rate policy
So what about Japan? The World Bank's economic outlook predicts that Japan's economic growth rate will slow further to 0.8% in 2023, down from 1.0% the previous year. However, this is a "real" figure that excludes inflation. Japan has been in a state of deflation for a long time, but over the past year, signs of inflation have been rapidly increasing.
The Consumer Price Index (all items excluding fresh food) rose 3.5% in April and 3.2% in May. At first glance, it appears that the rate of increase is slowing, but this is largely due to subsidies that are keeping down energy prices such as gasoline and electricity. The index excluding fresh food and energy rose significantly, by 4.1% in April and 4.3% in May.
On the other hand, the Bank of Japan has indicated that it will continue with its low interest rate policy, stating that price increases are "not yet sustainable or stable." The government also continues to aggressively spend, and the fiscal deficit is on the rise. This increases the likelihood that the yen will continue to weaken.
Concerned about the weak yen, or the yen's real currency value falling, wealthy individuals continue to move their savings into "real assets." The sharp rise in stock prices can also be seen as part of this trend.
Furthermore, the weak yen will attract inbound tourists from Europe, the United States, and Asia. These two factors suggest that demand for luxury watches in Japan has the potential to grow even further.
Economic journalist and professor at Chiba University of Commerce. Born in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Shimbun 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 newspaper 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).
[Tomoyuki Isoyama Official Website]
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