By and
with contributions from Alex Wynne
 on March 12, 2012

TOKYO — As Japan commemorates the one-year anniversary of the devastating earthquake and tsunami of March 11, there is an unstated sense of relief within the country that its economy and, perhaps more important, its spirit are beginning to bounce back so quickly.

But as Japan continues its recovery from what former Prime Minister Naoto Kan called its worst crisis since World War II, the gradual restoration to normality has brought with it the return of old concerns about the health of the aging nation’s economy in the longer term.

While some feared that consumers would drastically slash their spending for an extended period after the disaster in a sense of restraint, or fear for the future, the market bounced back within months. Luxury brands, struggling in Japan long before the tsunami took place, appear to have finished 2011 in a better place than many would have expected — although it’s worth noting that the continued strength of the yen plays a large role in the growth for companies who report their earnings in euros or dollars.

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As economists at Tokyo-based brokerage Nomura wrote in a report last week, overall consumer spending in Japan “more than regained” its pre-quake level in the third quarter of last year. While spending on services remained weak, spending on semi-durables, such as clothing and footwear, held up well.

More important, they also expressed optimism about consumer spending going forward — despite the fact that it looks increasingly likely that the Japanese government will raise sales taxes to fund reconstruction efforts.

“In the near term, we expect consumer spending to continue to rise steadily as consumption held back in the wake of the earthquake continues to emerge, the employment environment remains relatively favorable and government measures to stimulate consumption...are either extended or reduced,” the economists wrote, explaining that the potential tax hikes will be spread over 25 years.

Richard Collasse, president of Chanel Japan, said the period of “self-restraint” after the disaster lasted just until after Golden Week in mid-May, when spending started picking up again. Although he declined to give specific sales figures for the privately held company, he said that Chanel actually did better in cosmetics in 2011 than it did in previous years. Watches and jewelry performed well, and fashion came in just one percent below the house’s original budget, the executive said.

“I closed Chanel in the east of Japan for 10 days to give our people time to take care of their families. People who wanted to take their families out of Tokyo had the opportunity to do so. When you think that we closed about 60 percent of the business for 10 days, it is quite an achievement,” Collasse said. “Altogether we are surprised to see that the business was much better than we anticipated.”

He went on to state that he thinks 2012 will shape up to be a “fine year” for Chanel. “The first two months were very good. March has started very well. I feel it should be OK,” the executive said.

Similarly, Gucci chief executive officer Patrizio di Marco said 2011 was a year of “consolidation and recovery” for the Italian brand.

“This trend started in the second half of 2010 and was only temporarily affected by the tragic events caused by the earthquake last March. Paradoxically, apart from an understandable slowdown in sales in the weeks immediately following the earthquake, we have seen the local Japanese consumers become even more concerned about the values that we have ourselves been emphasizing, namely heritage, craftsmanship, ‘Made in Italy’ and also social responsibility,” di Marco said.

PPR’s luxury division, including Gucci, Bottega Veneta and Yves Saint Laurent, saw its 2011 sales in Japan grow 3 percent in terms of constant currency rates and like-for-like stores.

The Gucci chief, who spent five years in Japan working for Prada earlier in his career, said the country is still one of the most important and sophisticated luxury markets in the world. Hinting at a cut in prices in light of the strong yen, the executive said the brand intends to “minimize” the price differential with Europe and the United States.

Izumi Sasano, ceo of Giorgio Armani Japan, said the company’s business has seen a gradual and steady return since May and June, with local shoppers helping to offset a drop in tourist flows to Japan. He expressed a an optimistic view of the future, while also citing the potential volatility of the market in light of factors such as the exchange rate and the stock exchange.

“The Japanese market has suffered from the effects of March 11 but also from the economic downturn already under way at that time. There is evidence, however, that by the end of this year, the retail market will be on its way back,” he said.

Industry observers share that cautious view. Jeanie Chen, a consumer research analyst with CLSA in Tokyo, said that she believes overall spending is still below the level it was before the quake, but the market is starting to see a gradual improvement, particularly for high-end goods. Japan’s overall retail sales showed an eventual improvement by the end of last year, falling 3 percent in the first quarter, 1.7 percent in the second and 1 percent in the third and then rising 0.8 percent in the fourth quarter. Retail sales were up 2.5 percent in December and 1.9 percent in January 2012.

“I think people are cutting spending on things they don’t really care about so much, but they are saving money for things they desire more. So we actually saw spending on more luxurious products starting to pick up about six months after the earthquake,” Chen said, echoing comments by Gucci’s di Marco. “People [are interested in] things they think have a long-lasting value, so, for example, jewelry, artworks and expensive watches have been doing quite well over the past few months.”

Japan is still working to rebuild the northeastern part of the country ravaged by the massive earthquake and tsunami, which claimed close to 20,000 lives. Thousands are still living in makeshift temporary housing, and the most affected regions are seeing their populations dwindle as citizens migrate to other areas. But while Japan is making significant progress getting the affected areas back on their feet, economists are also starting to raise questions about the longer-term outlook for the Japanese economy, particularly in light of the yen’s continued strength, ongoing deflation and the high costs of reconstruction, which is estimated to be up to 12 trillion yen, or $147 billion.

“Among the various challenges that emerged following the earthquake are many serious structural problems that the Japanese economy faced even before the disaster, including fiscal deterioration, the hollowing out of industry, global competitiveness and the graying society. We reaffirm our view that Japan needs to take concerted action to address these problems in step with its post-quake recovery efforts in order to revive the economy,” Nomura’s economists wrote in their report.

One of Nomura’s concerns rests with the fundamental shift in how Japan sources its energy in the wake of the earthquake-induced nuclear crisis. The catastrophe at a power plant in Fukushima highlighted the potential dangers of relying on nuclear energy in a highly seismic area like Japan, where several usually small earthquakes occur each day. As recently as Saturday, the Northeast region near the devastated area was rocked by a 5.4 magnitude earthquake. Since the March 11 disaster, Japan has gradually shut down 52 of its 54 nuclear plants and started importing large quantities of fossil fuels and developing alternative energy sources like thermal power. That switch brings with it added costs for companies, including retailers, to operate here.

Nomura calculated that if Japan shuts down all of its 54 nuclear plants and replaces them with thermal power plants, electricity charges for households and companies could rise by 24 percent and 19.4 percent, respectively. The bank noted that the increased costs would substantially affect corporate earnings for certain manufacturing industries, as well as sectors “with low operating margins” such as wholesaling, retailing and textiles.

The economists went on to state that they are very concerned about the potential “hollowing out” of Japanese industry.

“Conditions facing companies establishing operations in Japan have clearly deteriorated, not only because of earthquake and tsunami risk, but also because of yen strength as well as power shortages and the nuclear power issue that have already become the focus of debate. All of this could encourage companies to shift production overseas,” they warned.

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