What: Japanese department stores face a significant downturn as tax-free sales drop 41% year-on-year in May, while a stronger yen and reduced consumer confidence challenge the sector's tourism-dependent business model.

Why it is important: The sudden reversal from record-breaking performance to significant decline demonstrates how currency fluctuations and international tourism can rapidly impact retail success, particularly in markets heavily dependent on foreign spending.

Japanese department stores are experiencing a dramatic shift in performance, with tax-free sales plummeting 41% year-on-year in May. This decline follows a period of exceptional growth, highlighting the sector's vulnerability to external factors. The strengthening of the Japanese yen from 160 to 143 against the dollar has significantly reduced the purchasing power of international visitors, while economic uncertainty has dampened tourist spending confidence. The impact is particularly evident in luxury goods and general merchandise, where sales have declined by 45.6%. Major retailers like Takashimaya, J. Front Retailing, and Isetan Mitsukoshi have reported significant drops in their inbound sales, with some experiencing double-digit declines. The situation is further complicated by potential policy changes, including discussions about abolishing tourist tax exemptions, and broader market concerns such as U.S. tariff uncertainties and China's economic slowdown. This downturn has triggered a broader reassessment of the sector's heavy reliance on tourist spending.

IADS Notes: The Japanese department store sector has experienced a dramatic shift in performance throughout 2024-2025. According to nippon.com in January 2025, the sector achieved record-breaking duty-free sales in 2024, with an 85.9% increase to YEN 648.7 billion, setting high expectations for continued growth. However, Japan Today reported in January 2025 that significant regional disparities were emerging, with major city stores growing 9.1% while regional locations declined 0.5%. This trend intensified as nippon.com revealed in April 2025 that major department stores were reporting sales declines ranging from 0.8% to 1.6%, primarily due to reduced tourist spending. Inside Retail's analysis in April 2025 highlighted the concentration of success in tourist-heavy locations, with Takashimaya reporting 80% of sales from just five flagship stores. The sector's vulnerability to external factors became starkly apparent when, as reported by Japan Times in June 2025, department store tax-free sales plunged 40% year-on-year in May, with average tourist spending dropping significantly, signaling a potential end to the tourism-driven boom.

Japan’s Department Store Shares Lag as Tourist Splurge Slows