June 22 (Bloomberg Businessweek) -- Tokyo, Japan's busy center of government, culture, and the economy, has been an expensive place to live for decades. Going to a movie theater costs about $22 per ticket, and renting a two-bedroom apartment easily costs $5,000 per month. Even travelers pay about $50 per night to sleep in capsule hotels, where guests stay in a "room" measuring about 2 meters (6 ft., 7 in.) deep, 1 meter wide, and 1 meter tall. As the yen has strengthened against the dollar, from 110 yen in August 2008 to about 90 yen to the U.S. dollar this month, the cost of living for foreign nationals paid in U.S. dollars has become tangibly more expensive in Tokyo.
In a new ranking by global human resource company ECA International, Japan's capital rose to become the most expensive city in the world for American travelers for the first time since 2005. The city's return this year was due largely to currency appreciation. Tokyo was followed by Oslo, Norway, and Angola's capital, Luanda. Exchange rates were also responsible for the rise in the cost of living in Seoul and Sydney, which climbed to 20th and 30th place, respectively, from ranks below 100 last year. Meanwhile, Manhattan, N.Y., the most expensive place in the U.S., fell 10 spots, to 29th place, as the U.S. dollar weakened.
"One of the major reasons for the volatility from the 2009 to the 2010 [ranking] was currency volatility over the past 12 months," says Lee Quane, regional director of Asia for ECA International. "We did see [some prices] increase, but it was pretty much benign."
Don't Forget the Beer
ECA International, which is based in London, surveyed 399 locations in September 2009 and March 2010 based on a basket of 128 goods, including groceries, transport, dining out, clothing, electronics, and such miscellaneous services as haircuts. Expenses such as rent, utilities, and school fees that are not typically included in a cost-of-living allowance were not counted. The survey focused on internationally recognizable brands—such as Kellogg's (K) cereal or Sapporo (SOOBF:OTC) beer—commonly purchased by expatriates.
While less-expensive options, such as local alternatives, are available, companies typically base the cost-of-living allowance on the amount needed to support a lifestyle similar to what a person had in the home country. Companies do not want employees to feel they are taking a loss to work overseas, says E. James (Jim) Brennan, senior associate at ERI Economic Research Institute in Redmond, Wash. "Accessing a certain product that is normally not found in that economy can be very expensive," he says. Other times, "the difficulty is not what the costs are, but what goods and services are available."
Also, depending on the situation, cheap alternatives are not always advisable. For example, the Centers for Disease Control & Prevention says illnesses such as typhoid fever can spread through contaminated water and food, so the center encourages travelers to avoid food from street vendors.
Depending on One's Lifestyle
How much one spends, of course, is often as much a choice as as a necessity. Ohio native Michael King, president of virtual computing company Citrix Systems' (CTXS) Japan operations, has worked overseas for the past 15 years and has been at his most recent assignment in Tokyo since January 2009. "Japan is always expensive," he says. "If you're paid in local currency, then it's less of a problem."
King says he pays about $15 for a U.S. magazine and $50 for a DVD. While leisure is certainly not cheap, food constitutes a large portion of his expenses. For convenience, King shops at expatriate grocery stores, where goods sell at a premium, and it is not uncommon for him to pay $50 for a steak. According to ECA International, the average price of 1 kilogram of rice in Tokyo is $8.47, and one dozen eggs cost $3.78. Dining in Western and Japanese restaurants is no cheaper—according to restaurant surveyor Zagat, dinner with a glass of wine plus tip in Tokyo costs $94, on average.
"You can find reasonable things, but the quality expectation for food here is very high," King says. In addition to the careful preparation involved in much of Japanese cuisine, he says many people are willing to pay more when certain foods are in season—for example, peaches from Yamanashi in the summer.
Of course, Tokyo is not categorically expensive. The city is packed with noodle shops and yakitori stands offering grilled chicken on skewers. Midrange retailers such as Uniqlo and H&M (HNNMY:OTC) have become popular. The same is true in other cities: In New York, for example, hot dogs, pizza slices, and sandwiches are among the cheap eats in a city where Zagat estimates the average dinner with wine and tip costs $42.
Assignees can live on less, but when companies send talent overseas, "they don't want it to be a negative experience for anyone," says ERI's Brennan.
Scaling Down Benefits
Sending employees overseas (often along with their families) is a significant investment for any company, especially because compensation and benefit packages must cover employees' overseas expenses as well as such obligations as mortgage payments at home. Costly as cities such as Tokyo are, they often serve as regional commerce centers and remain critical to multinational companies; the need to move staff overseas remains fundamental.
Even in today's business environment, ECA International's Quane says, employers need to make compensation attractive enough for employees to take assignments, not move to competitors, while the employer can still make a return on investment. Many employers have recently tried to trim benefit packages while ensuring that the employee's core compensation remains attractive, he says.
Until about five years ago, overseas assignments were viewed by many as cash cows—an opportunity to enjoy a good standard of living overseas while saving some money. Today, "companies are striking the right balance," says Quane. Housing allowances and paid trips home, for example, have been scaled down, he says. Assignees who may have received an allowance for a two- or three-bedroom apartment may now receive an allowance for a smaller rental. Some packages are being localized to line up with local standards. In locations that have become unprofitable, some employees have been sent home.
"Talent is never in excess," says Brennan. "Anyone who is proficient and versatile and valued enough to go international is a valuable product." While paying for $90 meals and $50 DVDs may be expensive while the dollar is weak and business is soft, Brennan says in the long term, the right person can be the solution to turning things around.