11th July 2024 – (Hong Kong) The once-thriving ecosystem of Japanese retailers, restaurants, and specialty stores that dotted the cityscape of Hong Kong is now facing an existential crisis. This dramatic shift is the result of a perfect storm of economic pressures, currency fluctuations, and changing consumer behaviours that threaten to reshape Hong Kong’s retail landscape for years to come.

At the heart of this upheaval lies the precipitous fall of the Japanese yen. Once a pillar of stability in the global currency market, the yen has plummeted to historic lows, trading at 160.86 against the U.S. dollar and 171.79 against the euro – levels not seen since 1986. This currency crisis has sent shockwaves through Japanese businesses operating in Hong Kong, eroding profit margins and challenging the very viability of their operation

The impact of the weakening yen is perhaps most visible in the struggles of iconic Japanese retail brands that have become fixtures in Hong Kong’s shopping districts. Don Don Donki, the quirky discount chain that captured the hearts of Hong Kong consumers with its eclectic mix of Japanese products, now finds itself at a crossroads.

Naoki Yoshida, president of Don Don Donki’s parent company Pan Pacific International Holdings (PPIH), recently made a startling admission during an earnings call: “We need to slow down and establish a solid management structure in Asia.” This statement, coming from a company that had embarked on an ambitious expansion plan just a few years ago, signals a dramatic reversal of fortunes.

The numbers tell a sobering tale. PPIH’s operating profit margin has plummeted to a mere 3.1% in fiscal 2022, a fraction of the 15.1% enjoyed by Fast Retailing, the parent company of Uniqlo. This stark contrast underscores the challenges facing Japanese retailers in Hong Kong’s competitive market.

Don Don Donki is not alone in its struggles. AEON’s LIVING PLAZA, a staple of Hong Kong’s dollar scene, has been forced to shutter multiple locations, including its flagship store in Sham Shui Po that had operated for over a decade. The closure of these stores, which once offered a wide array of Japanese household goods for just HK$12, symbolises the end of an era for budget-conscious Hong Kong shoppers.

The impact of the yen’s decline extends far beyond the retail sector. Japanese restaurants, once the darlings of Hong Kong’s culinary scene, are now feeling the pinch. Okonomiyaki Dohtonbori Restaurant, a popular chain that entered the Hong Kong market in 2017, announced last month that it would cease all operations in the city.

Even high-end Japanese dining experiences are not immune to these economic pressures. The once-booming Omakase restaurants, which saw waiting lists stretch for months during the pandemic, are now struggling to attract customers. With the yen’s value so low, many Hong Kong residents are opting to fly to Japan for authentic culinary experiences at a fraction of the cost.

Simon Wong Kit-lung, Chairman of the Quality Tourism Services Association, summed up the situation bluntly: “In today’s Hong Kong, if you haven’t closed three or four shops, it’s hard to call yourself a real player in the food and retail industry.”

While Japanese businesses in Hong Kong struggle, a new trend is emerging that further compounds their challenges: the mass exodus of Hong Kong shoppers to mainland China, particularly Shenzhen. The reopening of borders following the pandemic has unleashed a wave of cross-border consumption that is reshaping consumer behavior.

Hong Kong’s Census and Statistics Department reports that northbound border crossings into Shenzhen surged by 64% in the last six months of 2023, reaching 6.7 million. This exodus is driven by stark price differentials, with some everyday items costing up to 60% less in Shenzhen compared to Hong Kong.

The People’s Bank of China’s Shenzhen branch estimates that Hong Kong consumption in the city exceeded 8.6 billion yuan in 2023 – a staggering 70% year-on-year increase. This shift in spending patterns has transformed once-quiet border districts into bustling shopping hubs catering specifically to Hong Kong customers.

Adding another layer of complexity to this retail drama is the surge in Hong Kong tourists flocking to Japan, lured by the weak yen and the promise of bargain shopping. Japanese government data reveals that Hong Kong tourists accounted for 231,000 visitors in March 2024 alone, a year-on-year increase of nearly 60%. More telling is the spending power of these Hong Kong tourists. In the first quarter of 2024, they spent a total of ¥154.3 billion (approximately HK$7.823 billion) in Japan, an 86.3% increase compared to the same period in 2019. This positions Hong Kong as the third-highest spender globally in terms of daily spending per tourist.

The irony is palpable: while Japanese businesses struggle to survive in Hong Kong, the city’s residents are contributing significantly to Japan’s tourism recovery. This phenomenon further undermines the competitiveness of Japanese retailers in Hong Kong, as consumers increasingly opt to purchase Japanese goods directly from the source.

The challenges facing Japanese businesses in Hong Kong are symptomatic of broader economic divergences between Japan and other developed economies, particularly the United States. While Japan has maintained near-zero interest rates in an effort to stimulate its economy after decades of stagnation, the U.S. Federal Reserve has aggressively raised rates to combat inflation.

This interest rate differential has created a significant carry trade, putting further pressure on the yen. As Bank of Japan Governor Kazuo Ueda noted, “The yen’s recent moves are rapid and one-sided, and we are watching the currency market carefully.” However, with limited tools at their disposal, Japanese policymakers find themselves in a precarious position.

For Japanese businesses operating in Hong Kong, the path forward is fraught with challenges. The combination of a weak yen, shifting consumer preferences, and intense competition from mainland China presents a formidable obstacle to profitability and growth.

Some companies are already taking drastic measures. WeGo, a popular Japanese fashion brand that entered the Hong Kong market in 2016, announced it would close all its stores in the city when its leases expire on 1st September. This decision reflects the harsh realities facing many Japanese retailers in Hong Kong’s high-rent environment.

For those determined to stay, adaptation will be key. Don Don Donki, for instance, may need to reassess its product mix and pricing strategy to remain competitive. The company’s reliance on imported Japanese goods, which once was its unique selling point, has become a liability in the current economic climate.

Other Japanese businesses may need to explore new business models that leverage Hong Kong’s position as a gateway to the Greater Bay Area. By integrating more closely with mainland supply chains and capitalising on Hong Kong’s role in the Belt and Road Initiative, some companies may find new avenues for growth.