Currency Volatility and Luxury Retail: How the Yen's Rebound is Reshaping Japan's Market

The Japanese yen's rebound in 2025—from a 38-year low of ¥161.96 in late 2024 to around ¥145 against the dollar—has sent shockwaves through the luxury sector. For companies like Richemont, which derives significant revenue from Japan's high-end retail market, the strengthening currency has disrupted sales dynamics, forcing strategic recalibrations. This shift underscores a broader truth: in an era of volatile exchange rates, luxury brands must balance geographic diversification with robust forex risk management to thrive.

The Yen's Double-Edged Sword

The yen's appreciation is a product of household spending surges (up 4.7% year-on-year in May 2025) and cautious monetary policy from the Bank of Japan (BoJ), which has stalled rate hikes despite inflation exceeding its 2% target. While a stronger yen reduces import costs, its impact on luxury brands is nuanced:

1. Tourism Decline: Foreign tourists, particularly from China and Southeast Asia, now face higher costs for Japanese luxury goods. With the yen's strength eroding purchasing power, inbound tourism—a key revenue driver for brands like Richemont—has slowed. .
2. Pricing Dynamics: Brands pricing in foreign currencies (e.g., euros or Swiss francs) see their products become cheaper in Japan, boosting demand. However, this advantage is offset by weaker tourist numbers. Meanwhile, Japanese luxury brands exporting abroad face stiffer competition as their goods become pricier overseas.
3. Hedging Gaps: Companies relying on unhedged forex exposure, such as Richemont, face margin pressure. A stronger yen reduces the yen-denominated revenue of exports, while import costs drop—though the net effect depends on cost structures.

Richemont's Japan Dilemma

Richemont, the Swiss luxury giant behind Cartier and Vacheron Constantin, reported a 12% decline in Japan sales in Q2 2025, despite a 5.25% wage hike in Japan and rising domestic consumption. The contradiction highlights two key challenges:

• Tourist Dependency: Over 30% of Japan's luxury sales stem from foreign tourists. With fewer visitors, even rising local demand cannot compensate.
• Currency Exposure: While a stronger yen lowers the cost of Swiss-made goods in Japan, the drop in tourist traffic has outweighed this benefit. Richemont's reliance on unhedged yen revenue (vs. its home currency, the Swiss franc) exacerbates volatility.

Broader Implications for the Luxury Sector

The yen's rebound has exposed vulnerabilities in the luxury sector's reliance on tourism and geographic concentration. Key takeaways:

1. Tourism-Driven Markets Are Risky: Brands overly dependent on tourist-heavy markets like Japan, Paris, or Hong Kong face disproportionate forex risk. Diversification into emerging markets (e.g., Southeast Asia, the Middle East) is critical.
2. Hedging Strategies Matter: Companies using forward contracts or natural hedges (e.g., local sourcing) fare better. For instance, LVMH's regional supply chains and hedged exposures have insulated its Japanese business from yen swings.
3. Domestic Luxury Demand is Shifting: Rising Japanese wages and inflation-resistant spending on discretionary goods could boost local brands like Takashimaya and Frico—but only if they innovate to compete with European rivals.

Investment Plays: Betting on Resilience

Investors should prioritize firms with geographic diversification and currency hedging discipline:

1. LVMH (MC.PA): Dominates in China and the Middle East, with hedged exposure to yen fluctuations. Its Moët & Chandon and Louis Vuitton brands have pricing power to offset currency moves.
2. Kering (PRTP.PA): Luxury brands like Gucci and Bottega Veneta operate in multiple currencies, reducing forex risk. Kering's focus on digital sales and emerging markets adds stability.
3. Japanese Brands with Global Reach: Firms like Fast Retailing (9983.T) or Toyota's luxury division (Lexus) benefit from yen strength in exports but face domestic headwinds. Monitor their hedging disclosures.
4. ETFs: The Luxury Goods ETF (LUX) offers diversified exposure to global brands, though it remains tourism-sensitive. Pair it with inverse yen ETFs (e.g., DBJP) to hedge bets.

Conclusion

The yen's rebound is a wake-up call for luxury firms: currency volatility demands proactive hedging and geographic spread. Investors should favor companies with balanced exposure and robust risk management. While Japan's luxury market faces near-term turbulence, its long-term growth—driven by rising wages and domestic consumption—remains intact. For now, hedging strategies and diversification are not just tools—they're survival kits.

DISCLAIMER: This analysis is for informational purposes only. Investors should conduct their own due diligence and consult financial advisors before making decisions.