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Economy, Olympics Fuel Upbeat Mood in Japan

An upcoming hike in sales taxes and stagnant wages could potentially undermine the country's chances for a robust recovery.

TOKYO — Japan’s fashion week kicks off today against a backdrop of positive economic trends and optimism in the country still reveling after winning the bid for the 2020 Summer Olympics.

This story first appeared in the October 14, 2013 issue of WWD.  Subscribe Today.

But an upcoming hike in sales taxes and stagnant wages could potentially undermine the country’s chances for a robust recovery.

Retailers, fashion brands and observers have been talking about a newfound momentum in the Japanese retail market for several months, in line with a strong pickup in the country’s overall economy. Tight-fisted consumers have shed some of their caution on saving money in the post-tsunami era and are again treating themselves. Tourist flows are reaching record numbers.

Yet Japan’s Prime Minister Shinzo Abe, who has spearheaded Japan’s economic turnaround, has pushed through controversial legislation to raise the country’s sales tax to 8 percent from 5 percent next April and to 10 percent in 2015. And if the yen continues to weaken, foreign fashion brands and operators could see lower sales in real currency terms.

“Even 8 percent is very low sales tax [compared to other markets like Europe] but we have been paying 5 percent sales tax for a long time,” said Miyako Sekimoto, fashion director at the Matsuya department store. She added that an even weaker yen, which cuts into Japanese retailers’ ability to buy goods abroad, would force stores to raise prices more. “Probably the consumer will hesitate to buy expensive bags and clothes.”

Tadashi Yanai, chairman, president and chief executive officer of Asia’s largest retailer, Fast Retailing Co. Ltd, expressed cautious optimism when presenting the group’s full-year results Thursday. The Uniqlo operator posted double-digit net profit and sales increases but also warned that both earning and sales will grow at slower rates this year. Net profit is seen growing 1.8 percent to 92 billion yen, or $936.7 million, while sales are expected to increase 16.4 percent to 1.33 trillion yen, or $13.54 billion.

“Finally the economy is starting to improve; however, since the consumption tax will be raised, it’s cautious. But I think for the first time we’re able to see a turnaround. So naturally, we will also take advantage of that and I would like to increase our sales and profit,” said Yanai.

Kazumasa Terada, ceo and president of handbag company Samantha Thavasa, said he thinks most of the country’s population will feel the burden of bigger prices tags as their salaries stay at the same level.

“I think once the consumption tax increases, everyone’s sales in this business will noticeably decrease. I don’t think rich people will change, but for other people I think it will be difficult,” he said.

CLSA analyst Oliver Matthew said the bank expects consumer confidence in Japan to increase in the near term in light of improving GDP and the Olympic Games victory.

“[T]he question is what measures will the government take to spur on wage expectations in the face of the consumption tax hike? This, we believe, is clearly the factor dragging down consumer confidence, but the government has a few weapons to use including: tax incentives to corporations to increase wages and taking measures for the government sector,” he wrote in a research note early last month.

Similarly, economists at Nomura Bank said this month that they expect stimulus measures planned by the Abe administration to largely balance out the adverse effects of the consumption-tax increase. Nomura economists have also noted that there was no substantial drop in consumer spending after the last hike in the Japanese consumption tax in 1997, to 5 percent from 3 percent.

“Consumer spending trends before and after the consumption tax hike showed a spike in demand beforehand and a subsequent decline, particularly for durables, but there was no real downward move in the overall consumption level,” the bank’s economists said.

The sales-tax hike might induce consumers to stock up on luxury goods ahead of time, according to CLSA. The bank recently surveyed 177 Japanese consumers and more than a quarter of respondents said they would like to buy luxury items such as jewelry and clothes before a tax hike. It was one of the most popular categories for potential pre-tax-hike spending along with real estate; electronics and appliances, and cars and bikes.

Indexes for Japan’s consumer confidence, overall livelihood, income growth and employment are all higher in 2013 than they were in 2012, according to data from Japan’s Cabinet Office. In September, the consumer confidence index was 45.7, compared with 40.4 in the same month last year. The rise in employment is even more striking, with that index being 52.1 in September, compared with 38.2 a year ago.

Meanwhile, tourism to Japan, which took a major hit after the 2011 tsunami, has been recovering steadily. More than one million overseas visitors came to Japan in July, the highest monthly number since well before the earthquake and an increase of 18.4 percent over the same month last year, according to preliminary figures from the Japanese National Tourism Organization. August arrivals were up 17.1 percent to 906,700 people. A large portion of the visitors are coming from South Korea, Taiwan and China and shopping once again in areas like Ginza and Omotesando in Tokyo.

A string of executives and designers have passed through Tokyo over the past week to tout new stores and growing business in Japan. Several of them observed an optimistic mood and high foot traffic in stores.

“Obviously the general sentiment of the country is important, and everyone seems a little bit more positive,” said Marcus Wainwright, half of the duo behind Rag & Bone, who was in town to launch a pop-up shop in Isetan. This was his first visit here since December. “Last time we were here…it was quite depressing.”

Tokyo’s winning of the 2020 Olympics Games is bringing additional positive energy to the country. Alexander Wang president Rodrigo Bazan, who was here to open the brand’s Aoyama flagship, said the Games could provide a significant economic boost.

“I think Japan deserves it big time,” he said.