Tourist splurge in Japan creates new headache for luxury brands

By David Dolan

TOKYO (Reuters) - Tourists are flocking to Japan to scoop up high-end clothes and handbags at a discount thanks to the weak yen currency. Luxury goods companies like Louis Vuitton parent LVMH would rather they stayed home and shopped.

The yen's sell-off - it hit a 38-year low against the dollar last month before recovering ground - has sparked an unprecedented tourist boom, drawing savvy shoppers from Asia and elsewhere.

Global luxury brands aren't cheering, because their goods, ranging from designer sneakers to whisky, now tend to be cheaper in dollar terms in Japan than elsewhere, denting profits.

Some tourists, especially Chinese, are holding off on buying designer goods at home and splurging in Japan. The yen's volatility means companies can't easily hike prices to accurately reflect the currency, leaving them stuck with lower margins in Japan - at least while the yen stays weak.

Zhang Lei, a 29-year-old DJ from the southern province of Hunan, was visiting Japan for the first time but said he already wanted to come again.

"It's cheaper," said Zhang, who carried two Louis Vuitton shopping bags and one from sportswear brand Onitsuka Tiger on a recent Saturday in Tokyo's high-end Ginza district.

Nearby, some 15 people queued up to enter the Louis Vuitton boutique, fanning themselves in the sweltering heat.

Zhang said his purchases so far included shoes and a bag. He planned to pick up a watch next, he said, pointing to his wrist as he repeated "Rolex".

The trend has taken French luxury giant LVMH, which also owns Dior and Fendi, by surprise.

"We really have a big shift of business from Asia into Japan," Chief Financial Officer Jean-Jacques Guiony told a recent earnings call. It was having a "deflationary" impact on LVMH's China business as customers held off on shopping at home, putting significant pressure on margins, he said.

He also mentioned the difficulty posed by currency volatility, as currencies can undo moves "pretty quickly". That was put in sharp relief this week as the yen surged after the Bank of Japan raised interest rates on Wednesday.

DIOR, CHANEL, MOUNT FUJI

Louis Vuitton's popular Alma BB handbag goes for 14,800 yuan in China, the equivalent of $2,050. In Japan it sells for 279,400 yen, or $1,875. Last month it would have been available for as low as $1,725 when the yen was at its weakest.

The yen would have to strengthen to around 136 to the dollar to put the bag's Japanese price at parity with China. The currency was at 149.30 on Thursday, not far off its strongest in 4-1/2 months.

Chinese tourists were also helping fuel Japanese sales of luxury spirits, drinks maker Remy Cointreau said.

Japan generated strong sales growth, boosted by tourism and the weak yen, Remy Cointreau CFO Luca Marotta said on the company's first-quarter sales call, adding the sales were lower margin.

Swiss luxury group Richemont, which owns the Cartier brand, saw Japan sales increase almost 60% in the first quarter, helped by Chinese, Southeast Asian and American tourists, it said.

"Shopping, shopping, shopping," said Fumiko Annisa, who was visiting from Indonesia, about her itinerary.

"High-end brands are cheap here," she said. "We are going to buy Dior but we are going to Chanel first."

She also planned to visit the western city of Osaka and Gotemba near Mount Fuji, home to a sprawling outlet mall that sells brands from outdoor clothing maker Arc'teryx to Italian fashion house Zegna.

Japan had a record 3.1 million foreign visitors in June, official data showed last month, putting it on track to beat an annual record of almost 32 million foreign arrivals set in 2019, before the pandemic brought global travel to a standstill.

Spending by tourists is expected to reach 8 trillion yen ($54.74 billion) this year, according to the government, which sees tourism as a rare growth driver in an economy long hobbled by an ageing population.

New Yorker Yadwinder Singh said he hadn't expected to do much shopping until he saw prices in fast-fashion retailer Zara and other stores that were much cheaper than at home.

The 26-year-old said he was buying plenty.

"Clothes, jewelry, shoes - the whole outfit."

($1 = 7.2171 Chinese yuan renminbi)

($1 = 148.8700 yen)

(Reporting by David Dolan; Additional reporting by Sophie Yu in Beijing, Dominique Patton in Paris and Emma Rumney in London; Editing by Sonali Paul)