Once the darling of Japanese stock investors, department stores have lagged the recent broad market rally and could fall further behind as a strong yen dents tourist spending power. 

Low confidence stemming from economic uncertainty has also crimped tourist budgets with data compiled by the Japan Department Stores Association showing tax-free inbound sales at over 80 department stores across the country fell by 41% in May from a year earlier. The number of shoppers also slid, despite the tally of visitors setting a new record.

“The yen has gotten a bit stronger, which makes them feel like the deal isn’t as good anymore,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management. “Even if tourists visit Japan, whether they want to make purchases will depend on the level of confidence they have,” he added referring to their conviction in the economic strength of their home country.

The drop in sales continued into June with retailer H20 Retailing Corp. and Matsuya Co. Ltd.’s flagship stores announcing two-digit decline from a year earlier.  Isetan Mitsukoshi Holdings Ltd. saw a decline of nearly a tenth from a year ago.

Retailer Takashimaya Co. this week lowered its inbound assumptions and cut its full-year outlook, while  J. Front Retailing Co.’s operating profit from its department store segment fell by 13% in the March-May period on weak luxury sales. Shares of Takashimaya fell 2.2% and J. Front dropped 3.4% last month, compared to Topix’s 1.8% gain in the same period. 

The Japanese yen gained 4% against the dollar in the last quarter amid dollar weakness. In the past year, it has strengthened versus the dollar to around 143 from 160.

Consumer confidence is already deteriorating in the world’s biggest economy, with a surprisingly weak June reading in the US. Anxiety will likely become even more visible ahead as some goods may see tariff-related price increases occur this summer, according to Eliza Winger at Bloomberg Economics.

Booming tourism has helped Topix’s sub-index for the retail sector rise 22% last year, supporting Japan’s broader stock market. But a further drop in shares may weigh on the Topix which is now near its all time high. 

Shares of Kansai-based Kintetsu Department Store Co. fell 20% over April-June, while Isetan Mitsukoshi also underperformed the broader Topix. Kintetsu Department Store is scheduled to post earnings on July 11, and Isetan Mitsukoshi will report on Aug 8. 

An earthquake prophesied by a viral manga may also deter luxury shoppers. Although scientists debunk such predictions, airline bookings from Taiwan, South Korea and Hong Kong have dropped since April, according to Bloomberg Intelligence analysis of ForwardKeys data. A drop may further weigh on sales as visitors from the three regions accounted for one third of total spending by inbound tourists in 2024, according to data from Japan Tourism Agency. 

Added to that, local media has reported that the Japanese government is mulling the abolishment of a tourist tax exemption which could muddy the long-term outlook further. 

To be sure, valuation of shares may seem appealing to some investors with Takashimaya and H2O Retailing trading below their book value after the selloff, triggering speculation the firms may enhance shareholder returns and boost price-to-book ratios. 

But the glory days for the luxury sector seem to be over as investors seek other plays at a time when the economy is shifting into higher gear. 

“Growth rates for department stores is highly likely to slow down going forward and we may soon see investors starting to secure profits and rotate into other sectors,” said Hiroki Takei, a strategist a Resona Holdings Inc.