[2022 Edition] Luxury watch market from an economic perspective – Part 2

Following on from the first part, this time too we will be bringing you Commit Ginza's (hereinafter referred to as "our store") subjective report on "luxury watch prices from an economic perspective."

In the second part of this article, we would like to talk about the future direction of luxury watches, which I'm sure you're all curious about, so please read to the end.

↓↓If you haven't read the first part yet, click here

In recent years, there has been a common belief that when stocks crash, the Japanese yen, a safe asset, is bought around the world. In fact, when stocks crash, the yen tends to appreciate on the same day. After the Lehman Shock, the exchange rate was linked in this way until the early 2000s.

Since then, the Bank of Japan had the world's lowest interest rates for a long time, so the Japanese yen was sold and other currencies were bought around the world (this is a risk-on phenomenon). In short, after Lehman Brothers, risk-off occurred, and the yen carry trade was unwound, so a large amount of yen was bought back, causing the yen to appreciate. There are of course other reasons. However, I don't think it is because the Japanese yen is a very safe asset.

In fact, before the current COVID-19 economic crisis, the euro had a negative interest rate, making it cheaper than the Japanese yen. Therefore, it can be speculated that the low-interest currency that was unwound during the risk-off period was the euro, not the Japanese yen. The euro is also now high. Initially, even though Europe was in trouble due to COVID-19, it can be predicted that the reason the euro did not become cheaper was because of the reversal of the euro carry trade.

I'd like to make an important point here. Due to COVID-19, paper money is being printed worldwide. Statistics show that the world's money stock, or in a sense the "total amount of money," has increased by about 1.8 times compared to the beginning of 2020. For example, if the total amount of money doubled, the value of the "face value" of money would be halved. If it increased tenfold, it would be one-tenth. If the supply increases, the value of the face value will decrease, so it's only natural that prices will rise.

Paper money is being printed every year, and the total amount of money in the world is increasing. In other words, the value of "1 yen" and "1 dollar" is steadily decreasing. Japan is famous for being a rare country in the world where prices have not increased for nearly 30 years. Even when comparing 1990 and 2021, there has been almost no change in the price of McDonald's Big Mac (370 yen ⇒ 390 yen) and Yoshinoya's beef bowl (400 yen ⇒ 420 yen). Japan is already the cheapest Big Mac among developed countries in the world, and is at the same price as Sri Lanka.

However, 50 or 80 years ago, the face value was low even in Japan. The proof is the existence of the "1 yen note". One theory is that the construction cost of the Yamato battleship was 200 million yen. In those days, prices were rising steadily in Japan.

In Japan, 10,000 yen in 2000 is considered to be the same as 10,000 yen in 2021, but if we think globally, goods and services that could be purchased for 10,000 yen (100 dollars) in 2000 can now be purchased for 200-300 dollars overseas in 2021. The list price of a Rolex at that time is two to three times higher. Imported cars such as Mercedes Benz, Porsche, and Ferrari have also doubled to three times higher.

In terms of Ferrari, a 1995 F355 has a list price of 12 million yen when new, a 2004 Modena is 16 million yen, and a recent V8 Ferrari is close to 40 million yen. Since they are the same grade of Ferrari, if you were to buy one new, you would have to pay more to get an equivalent product. You could also say that the value of money has gone down. There are also many indicators in Japan. For example, when it comes to professional baseball players, Ochiai, who had the highest annual salary at the time, was around 100 million yen. After that, Kiyohara broke the record with 300 million yen. However, the highest annual salary today is probably 700 million yen or 800 million yen. The jumbo lottery ticket also used to be 100 million yen. Now it's 1 billion yen. (laughs)

When comparing the same top-ranked items, the face value has increased. This theory would hold up if he was producing 10 times the results of Ochiai in a single year. If we use the value of things as an indicator rather than the value of money, we can see that more money is needed to buy the same things than in the past. This is evidence that the total amount of money has increased and the value of money has decreased.

It is often said that Americans do not save money. In Japan, we have been taught since ancient times that saving is a virtue and steadfastness. Japan's values ​​in this area are different from those of other countries in the world. Whether this is good or bad is a different matter. I think that in countries other than Japan, it is recognized that the value of money will decrease to some extent. Therefore, it is exchanged for stocks, finance, and real assets. Consuming money and converting it into real assets are different things. Waste and consumption are different things. Which is more steadfast? What if you bought a Rolex in 2000? What if you bought a Picasso? What if you bought an apartment or real estate? If you think about it, you will realize that buying a luxury watch is a hedge to protect your assets. If you already have one, you will be glad that you bought it. I feel that the same trend will continue to repeat in the future. Unless austerity measures are implemented all over the world.

As you know, after the Lehman Shock, stocks crashed worldwide. To make up for the financial downturn, real estate and many other real assets were dumped, causing prices to fall. This trend has been seen in the bubble collapse in the early 1990s, the IT bubble collapse around 2000, the Lehman Shock in 2008, and the Corona Shock in 2020, with a time lag from the collapse of stocks about 10 years apart, with each real asset falling in tandem. In fact, it was around 2013-2014 that the market for watches began to mature with an increase in high-value transactions, as it has recently been, and it seems that there was a shift in the recognition and position of watches as part of real assets, from being a hobby. Following art, they have joined the ranks of real assets.

In the auction market, with the exception of very rare pieces or pieces of great historical significance, no wristwatches reaching the 100 million yen mark had appeared for many years. This was broken by the 2013 "CHRISTIE'S DAYTONA LESSON 1" organized by watch auctioneer Aurel Bacs (now Phillips). This is thought to have sparked the boom in vintage Rolexes.

In the international art market, the key point is for an artist to value their work at $1 million, or the highest price possible, and once it touches $1 million in the auction market, the price jumps to $2 million, $3 million, and so on. It can also be said that there are many wealthy people who use $1 million as a minimum investment standard. A good example from recent years is Banksy. It took over a decade for his work to reach the $1 million mark, but it only took a few years for it to surpass $10 million.

Since a watch worth over 1 million US dollars was sold at an auction in 2013, the highest prices have risen steadily to 200 million, 300 million, 500 million, and 1.7 billion. Luxury models from Patek Philippe, Audemars Piguet, and Rolex, as well as watches worth over 10 million yen, are now commonly circulated and traded. Moreover, the secondary market prices of these watches are often two to five times higher. Around 2000, even watches worth around 3 million yen were considered to be at the highest price level, and models with dials covered in diamonds, which have become common in recent years, seem to have been ornaments in flagship store show displays. The price at that time was 10 million yen. People would jokingly ask, "Is it an Arab oil tycoon who is buying this?"

Since the collapse of the bubble economy in 1990, there have been crises every 10 years, with the last one being the Lehman Shock in 2008. The coronavirus crisis has not yet ended. It is impossible to predict what will happen from now on. Also, I feel that the mature luxury watch market that is recognized in the world today has no history of facing a global stock market decline. Therefore, I would like to analyze the art market, which has a long and mature history.

Art and vintage coins have been charting upwards for many years. Even if you look at the 10-year, 20-year, 30-year, 50-year, and 100-year charts, they are all rising upwards. If you look at the spot charts, there are crashes, but they recover within a few years and are back on an upward track.

For example, at Christie's London in 1987, Yasuda Life Insurance won Van Gogh's "Sunflowers" for 5.3 billion yen, the highest price ever paid at the time. The winning bid was more than double the expected price. It was mocked as "Japan money" bidders grabbing high prices, and there was considerable criticism afterwards that it suffered huge losses when the bubble burst in 1990. However, it is said that "Sunflowers," which is said to have fallen to less than half its value after the bubble burst, is now worth 30 to 40 billion yen.

Art is also a real asset, and I believe it is an extremely expensive collection that the world's wealthiest people end up with. When art fell with the collapse of the bubble in 1990, it naturally fell in price accordingly. After that, it gradually returned to its original value over the course of a few years, and then rose again, but then fell again with the collapse of the IT bubble in 2000. It then recovered again, and the price continued to rise again. The same happened with the Lehman Shock in 2008. Art dealers and watch dealers agree that "good things never fall in value. There will always be people who want good things."

By "good quality" I don't mean a model that costs tens of millions of yen. The definition of "good quality" varies depending on the condition of each individual watch, the presence or absence of accessories, and so on, even within the same Rolex and the same model, but what is common is that "good quality" = "high demand, low supply."

I expect that in the future, luxury watches will follow a similar chart as art. When there is an economic crisis, prices will drop for a while, but it is expected that the prices will bounce back, starting with the best ones. Even if the prices are lowered, there will be people who will buy them at the lower price. It's all based on the law of supply and demand, and once the scramble for high-quality pieces that have dropped in price is over, prices will start to rise due to their rarity.

As the current model is being manufactured daily and the number of units is increasing, it is impossible to grasp the total number, and there is a risk that production will suddenly increase in the future, causing the value to fluctuate.

On the other hand, discontinued models have a fixed number of pieces in existence in the world, and even the manufacturer cannot turn back time and increase production. There are many people who want to buy such luxury watches, and even in times of economic downturn, there is no end to people who want to buy them not only as assets but also as hobbies and collections. Luxury watches contain a lot of value that cannot be expressed in a single word, such as stories and manufacturing secrets for each watch. And I think it is one of the wonderful hobbies that combines the fun of wearing them with asset value = practical profit like dollar deposits. I hope that you will use these as a reference and add a luxury watch to your assets.

*This article uses a lot of statistical data, but since it is merely an explanation of the outlook for watch prices, no references will be cited. Please forgive any errors in the figures.

As I have discussed in the first and second parts of this article, I believe that the market for luxury watches, which are being recognized as real assets, will continue to expand due to high demand.

Although the COVID-19 pandemic has yet to be contained, why not take this opportunity to consider building assets with luxury watches in anticipation of the next economic crisis?

I hope this article will be of some help to you when buying and selling watches.