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Brands Boost Prices to Battle Weak Yen

Japan's economic growth appears to be losing momentum as a consumption tax hike looms and a weak yen ushers in price increases.

TOKYO — Japan’s economic growth appears to be losing momentum as a consumption tax hike looms and a weak yen ushers in price increases for luxury brands like Louis Vuitton and Hermès.

This story first appeared in the February 19, 2014 issue of WWD.  Subscribe Today.

The country’s gross domestic product grew 0.3 percent in the October-to-December period from the previous quarter and 1 percent on an annualized basis, Japan’s cabinet office said. Those figures are below market expectations and raise questions about Prime Minister Shinzo Abe’s drive to restore sustainable growth to the world’s third-biggest economy.

Private consumption rose 0.5 percent in the quarter, higher than the 0.2 percent in the previous three months. But Japan’s sales tax will jump from 5 percent to 8 percent in April, which is likely to impact consumers’ spending habits and could dent a recent rebound in luxury goods sales.

Meanwhile, a weak yen is starting to pose problems for European companies. Last week, Hermès said its fourth-quarter sales in Japan declined 18.3 percent because of the weak yen. The French company said it plans to raise prices in Japan by as much as 10 percent this week to compensate for the weak currency. Similarly, Louis Vuitton Japan recently revealed that it will increase its prices by an average of 7 percent as of Feb. 26.

The yen has shed about 8.4 percent of its value against the dollar and about 10 percent against the euro over the past year.

Brands like Hermès and Vuitton that have ranges of evergreen products that last for years rather than seasons tend to feel the impact of currency shifts more acutely than labels with a higher percentage of seasonal merchandise with a shorter shelf life.

Prada is still “analyzing” the pricing situation, while Giorgio Armani is not planning to raise its prices at the moment, according to spokeswomen for both brands. Similarly, Tiffany & Co. has no current plans to change its prices, a spokeswoman said. Gucci declined to comment on pricing while Chanel and Dior did not respond to requests for comment as of press time. Coach said its prices are stable for its ranges of Madison leather and saffiano handbags, key components of its March product offering.

A spokeswoman for Isetan Mitsukoshi Holdings downplayed the impact of brands’ price increases on actual sales for the department store.

“In the past as well, there have been times when luxury brands have raised their prices due to the effects of foreign exchange rates, but we didn’t really see a drop in sales because of that, so this time we’re looking at it in the same way. We just want to do what we can to ensure customers are not confused,” she said.

Shoppers are already bracing themselves for higher prices when the consumer tax hike to 8 percent goes into effect in April. It will jump to 10 percent next year.

Retailers are trying to come up with creative solutions to the tax increase. Takashimaya is planning to change up its merchandise mix from April onwards so consumers are seeing new products rather than familiar ones with marked-up prices, according to a spokesman for the retailer. He said the store is also putting an emphasis on products that help consumers save money, like kitchen goods for cooking at home as people might opt to eat out less.

Nomura Bank economist Tomo Kinoshita said demand ahead of the tax increase has centered on durable consumer goods until now but that should change next month.

“[J]udging from consumption behavior in the run-up to the previous consumption tax hike in April 1997, we expect the rush in demand to spread to nondurable goods such as food and other daily necessities in March,” the economist wrote in a note. “Although the labor market has been tightening, considering economic measures to be implemented we maintain our view that the consumption tax hike will negatively affect quarterly GDP growth only in [April to June].”

In an interview earlier this month, Gucci president and chief executive officer Patrizio di Marco expressed caution on the tax rise but he said it’s important to keep things in perspective.

“I’m concerned about the tax increase, but…for years the concerns [about Japan] were so many and so significant that this becomes something easier to digest,” he said, adding that he’s hopeful that Japan’s economy will stay strong and consumers’ optimism will continue.

Japanese retailers posted strong comps in January, thanks to brisk demand for winter apparel and high-end products. Fast Retailing said same-store sales at its Uniqlo stores in Japan grew 15 percent. Isetan Mitsukoshi Holdings said sales at its nine major stores were up 10.5 percent. But February comps might not fare as well given that two major snowstorms have hit the country, disrupting public transportation and roadways over the past two weekends.