[2022 Edition] Luxury watch market from an economic perspective - Part 1

As the title suggests, this time we will be presenting the subjective "luxury watch market from an economic perspective" from Commit Ginza's (hereinafter referred to as "our store") perspective in two parts.

December 2019, China: It has been two years since the coronavirus infection was reported in Wuhan. The coronavirus has spread worldwide, restricting economic activity and imposing many restrictions on daily life. In response to this great recession, governments around the world have been handing out money, and it is said that the total amount of money in the world has increased by about 1.6 times since January 2020.

No one knows when or how this coronavirus crisis will end, but it seems certain that this monetary easing is closely related to the rise in prices of real assets.

What on earth is this?! I will explain it as simply as possible, so please read to the end.

Since the beginning of 2020, the spread of the coronavirus has temporarily led to a decline in global stock prices, but since then, stock prices have soared worldwide, reaching new highs all over the world. With the economy in a slump, not only are stock prices rising, but many real assets such as real estate, art, and luxury watches are also soaring in value.

But are they really rising? You may have recently started to hear the word "inflation," which means a decrease in the value of money. If countries around the world print too much money, it will naturally result in "inflation."

Let's take a closer look.

The US dollar is the key currency for financial and commodity transactions around the world, and there is an important relationship between luxury watches and the US dollar. In the few years following the Lehman Shock in 2008, which is still fresh in everyone's memories, the yen appreciated to the 70-80 yen range per dollar.

First, I will explain using the Daytona Ref. 16520 as an example.

At that time, the Daytona Ref. 16520 was traded overseas for about 10,000 dollars. Converted to Japanese yen, this is about 800,000 yen. The domestic market price was about 900,000 yen including import consumption tax. After that, Prime Minister Abe took office in 2012, and the economy started to recover slightly as the exchange rate rose to the 120 yen range under the Abenomics policy. The price rose by about 10% overseas, and it began to be traded at around 11,000-12,000 dollars. If the yen weakens to 120 yen to the dollar, the price will be converted to 1.5-1.6 million yen.

A 10% price increase of 1.1x is converted to Japanese yen at 1.6x to 1.8x due to exchange rates . Even though the price has not actually increased that much, it is not rare to feel that the price has increased due to these external factors.

It is said that the Abenomics policy has caused the Nikkei Stock Average to triple, but due to the effect of the yen's depreciation from 80 yen to 120 yen, when overseas investors look at the Nikkei Stock Average in US dollars, they also see that it has not risen that much.

"Nikkei average 8000 yen (1 dollar is 80 yen) → Nikkei average in US dollars is 100 dollars"
⇩3 times the price⇩
"Nikkei average 24,000 yen (1 dollar is 120 yen) → Nikkei average in US dollars is 200 dollars"
If you pay in dollars, it's double!!

Since the majority of the domestic stock market trading volume is made up of foreign investors, the increase should be calculated in dollars. Not many analysts are aware of this contradiction.

*In Japan, we are used to thinking mainly about cash, the Japanese yen, and we are fixated on that figure. If we only care about the increase or decrease in the figure after converting it to Japanese yen, I think we will not be able to make macro judgments.

Continuing with the example of the Daytona "Ref. 16520," the market price began to rise around 2015. The final model number, the P serial number, and then the A serial number became particularly popular. This is a Luminova dial. In terms of the absolute number of individual pieces, the Tritium dial, which can never be obtained again, became more valuable than the Luminova dial, which can be obtained even if it is exchanged.

Since original parts are important for Rolex, I think the rarity of the parts is valued because they are no longer available once they are replaced. Currently, the market price for a "Daytona" Paul Newman is over 25 million yen, and rare models, including those in good condition, can go for hundreds of millions of yen.

Speaking of rare, the number of Milgauss Ref. 6541 and Day-Date Oman dial watches is much smaller than that of the Daytona Paul Newman, but the price of the Paul Newman is overwhelmingly higher. This is because, while the absolute value of rarity is taken into account, This can be said to be the result of a balance between supply and demand .

As an aside, there are hundreds of thousands of Sea-Dwellers with the already discontinued Ref. 16600 in existence worldwide. Of these, only 300 have the COMEX double name. In terms of ratio, it is less than 1 in 1,000 rare. A clean Sea-Dweller with the Ref. 16600 can go for over 1 million yen, but the current market price for a COMEX is 12 to 14 million yen. It is very expensive, but considering its rarity of 1 in 1,000, it seems a little cheap at 12 to 14 times the price of a normal one.

It is said that the market price of a watch has gone up or down, but if you look at the amount based on the Japanese yen, you cannot measure the actual value. This is what I explained in the previous chapter.

If a Rolex you bought for 1 million yen goes down to 900,000 yen, don't just take it as a drop in price, but instead think of the same Rolex that you previously had to pay 1 million yen to buy, but now you can buy it for 900,000 yen. Since Rolexes are the same item, the fact that you can buy the same item for a smaller amount can also be said to mean that the value of the Japanese yen has increased. In such cases, stocks and financial products are often proportional at the same time, so if you pay 900,000 yen, you can buy stocks worth 1 million yen.

The market price of luxury watches is the global market price. And the market price is based on the US dollar. In other words , owning a Rolex can be thought of as owning US dollar cash . The same goes for gold bullion. You can also say that you are holding US dollar cash.

If you own a Rolex with a market value of 1 million yen, and the yen appreciates by 10 yen from 110 yen to 100 yen, the market value will definitely approach 910,000 to 920,000 yen. The market price of watches lags about 2 to 6 months after the exchange rate changes, so a sudden appreciation of the yen is a good time to sell, and conversely, if the yen weakens sharply, it is a great time to buy. These discussions are based on the Japanese yen, though.

Japanese yen, or "cash," is an asset, but it is also an asset that can only be used domestically. For Japanese people, when they see Brazilian reals, Russian rubles, or Chinese yuan banknotes, they are not recognized as "high-value bills" like 10,000 yen bills, and to put it bluntly, they are merely pieces of paper. If you could buy a 10,000 yen bill from another country that you have never seen before for 2,000 yen, would you buy it? On the other hand, I think that people in Brazil, Russia, and China also view Japanese yen banknotes in the same way.

In today's global world market, the differences between imported products from each country are becoming smaller.

This was about 10 to 15 years ago, but the stainless steel model of the Daytona Ref. 16520 was extremely popular. At the time, the domestic market price was around 1 to 1.2 million yen. Meanwhile, the unpopular combination model of the same name, the Ref. 16523, was selling for around 600,000 to 800,000 yen, despite its higher list price than the stainless steel model. Since the market price for the combination model and the stainless steel model was about the same overseas, it seems that foreigners would buy them in Japan, where they were cheap, bring them back to their home countries and sell them at a profit.

Nowadays, with the spread of the Internet, it can be said that such price differences have almost disappeared around the world. In other words, the current situation of luxury watches is that the price is almost uniform around the world. Moreover, most prices are based on US dollars (the price of luxury watches is determined globally in US dollars, and then converted into each country's currency before being sold).

Luxury watches are recognized as assets in countries around the world, just like the US dollar, art, fine art, gold, bullion, etc., and their value is recognized globally in every country.
In countries around the world, a Rolex worth 1 million yen is recognized as being more valuable than a stack of 1 million yen in Japanese yen cash.

When it comes to buying a 1 million, 5 million, or 10 million yen Rolex or Patek Philippe, most Japanese people would think about it and make the decision to buy. Some people make an instant decision. But think about it. In many countries around the world, luxury watches are more valuable than the Japanese yen. There is no need to worry about transferring an equivalent amount of assets to something of higher value.

Spending 1 million yen on a trip abroad or drinking 1 million yen wine at a high-end club can be considered the purchase of a luxury experience. On the other hand, buying a 1 million yen luxury watch can be understood as a simple relative transaction and an exchange of equal value. It is completely different from spending money on dining, drinking, or entertainment.

And when you sell it after using it regularly, it will be worth more than you paid for it. There are many items that are profitable and can even sell for several times the price.
*For more details, please see the article on buyback rates here.

Luxury watches are valued in US dollars, just like "art", "fine art", "gold bullion", "platinum", "gasoline", etc. For example, if a Rolex is worth $20,000, it is a US dollar asset, so it is no exaggeration to say that you are holding $20,000 in US dollars or having a fixed deposit in US dollars. Of course, if the yen appreciates, the value converted into Japanese yen in Japan will decrease, and if the yen depreciates, the opposite will happen.

Don't worry about that, just think about the amount in US dollars. The US dollar is basically a currency that carries interest. Currencies that carry interest expand the total amount of money. This means that the value of one dollar decreases year by year. They say that the inflation target is 2%, but if it rises by 2%, it will be 102% the next year, and the value of 10,000 yen will be about 9,800 yen. It is often said that foreign currency deposits and foreign currency investment trusts have the risk of losing their principal due to fluctuations in exchange rates, but I think you understand that this is not related to the risk. The risk is not there. It is important not to fixate on the face value of the Japanese yen. In the first place, since money is being printed, it should be considered to depreciate.

If 1 dollar is 110 yen, then it is 2.2 million yen, if 100 yen, then it is 2 million yen, and if 1 dollar is 90 yen, then it is 1.8 million yen. Holding dollars also means diversifying your assets, and you can enjoy owning a luxury watch. Of course, there is the risk of losing it or having it stolen, but if you consider the type and condition of the watch, you can probably think of your assets increasing year by year in US dollar terms. Even if you look at periods of 3, 5, 10, 20, or 30 years, they have all been increasing so far.

The most well-known real asset in the world is "gold," but gold and watches are real assets, and the items themselves do not grow, nor do they generate interest. Moreover, the euro zone has negative interest rates, so zero is better.

When the world economy is doing well, stocks and financial products with yields are bought, creating a so-called risk-on state. In that case, a strategy is adopted to take risks and increase money, and real assets such as gold, a "stable asset," are not bought. Conversely, when the economy becomes unstable, stable assets such as gold and cash such as US dollars and Japanese yen are bought, as was the case during Lehman Brothers and the current economic shock. Bonds are then bought as safe assets in the risk-off situation, and interest rates fall.

What did you think.

In the first part, we discussed the relationship between watches and the economy based on actual price movements. Luxury watches are dollar-denominated assets and are affected by exchange rates, but they are beginning to be recognized as real assets like "art" and "fine art," and demand is increasing year by year.

So what will happen to the value of watches in the future? We hope to discuss this in the second part, so please look forward to it!

↓↓Click here to see the second part