Ichiro Suzuki
Tourists are back. After having been held back for a couple of years by COVID, tourists are traveling around the world once again, in vengeance. Japan is one of their favorite destinations. ‘The Japanese yen’s ‘historic fall’, as often dubbed in the financial markets, is making Japan very attractive to them, from a cost perspective. The Japanese government has an ambitious goal of receiving 60 million visitors in 2030, doubling from the pre-pandemic peak. Visitors are on pace to beat what once looked a lofty goal.
Taking advantage of an inexpensive yen, visitors to Japan are displaying their purchasing power. They are making an estimated ¥3 trillion net contribution to Japan’s service balance. In the early years of the 2010s, Japan’s trade balance fell into deficits. Ever-lasting appreciation of the yen, it was perceived back then, drove Japanese manufactures out of the country, to be close to where demand is, slashing exports from Japan. Then, having built supply chains with factories overseas, they show scant signs of coming back home even though that might make sense with today’s exchange rate. Exports to these markets are lost almost for good while their products continue to be sold there. In the years that followed the pandemic, sharp rises in crude oil prices, the single largest import item, has expanded a hole in the trade account. Amid growing trade deficits, tourists’ ¥3 trillion contribution is helping the overall external accounts immensely. In the fiscal year to March 2024, trade deficit narrowed materially to ¥2.5 trillion down from over ¥16 trillion as crude oil prices fell, but the trade account was still in deficit. Without contribution from tourism the yen would have been under even greater downward pressure. That said, ¥3 trillion is only 0.5% of Japan’s GDP, which is ¥600 trillion. It is too much to expect that tourism carries the economy.
A bonanza from tourism might find it difficult to keep going in a land of shrinking population. Fewer hospitality industry workers will have to accommodate a growing number of visitors. Worse, as was the case with other countries, the pandemic at the height of its assault forced the hospitality industry to let their workers go. Those who left the industry don’t easily come back. On top of it, Japan‘s closure of the country was more stringent than others, driving relatively low-skill foreign workers back to their home countries. The industry wants them back but today’s weak yen is making Japan look less appealing to them. Many of these people might never come back. In the near future, visitors’ number would hit supply capacity.
One way of expanding tourism is raising revenue per visitor. In the pre-pandemic years, the number of visitors shot up on group tourists, especially those from China. Group tourism serves the purpose of letting the country be known to as many people around the world as possible, but spending per visitor has been relatively low, notably on accommodation. Here is what David Atkinson, who was Goldman Sachs partner and tourism advisor to former PM Abe, says. “Japan lacks infrastructure to accommodate high end segment visitors. The country has acutely limited supply of five-star hotels. There is an absolute shortage of expensive suites whose rates are thousands of dollars per night. After these well-to-do visitors spend their day visiting famous temples and shrines, there are few high-end night clubs where they can spend their hours after dinner. Arab sheiks go on a vacation on a million dollar budget per person, but there is no way they can spend that much money visiting Tokyo, Osaka or Kyoto. Since he said it ten years ago, Japan has been building five star hotels to some extent but not to the level of other countries yet. Chinese group tourists no longer come even though the pandemic is over. Tightened visa restrictions have not been loosened to Chinese visitors primarily due to aggravation of bilateral relations. (By the same token, not many Japanese are visiting China these days, either.) Rising tourist numbers without Chinese groups brings greater revenue per visitor. The industry is moving to a right direction, but that still doesn’t solve a fundamental problem of capacity constraints.
Like other popular tourist destinations in other countries, the problem of over-tourism is weighing on the hospitality industry. It is beginning to threaten life of local residents in highly popular places, with noise, littering, overburdened local public transportation system. It hits visitor satisfaction, too. This is already happening and it can get worse on the way to meeting the government’s goal of 60 million visitors in 2030. The City of Venice has started collecting fees to those who enter the city. This can be done to an island, but it isn’t possible to build a wall around Kyoto and charge an entrance fee at the gates. Nonetheless, collecting fees of some kind, such as hotel tax, which is minuscule today, by local governments from visitors, including Japanese visitors, help local governments to reduce the pains of over-tourism to a certain extent. They can deploy more trash cans on the street, collect garbages more frequently, suppressing the number of visitors at the margin. While such actions still don’t solve a fundamental problem, they are the first step to greater tourism revenue while not alienating visitors.
While revenue from tourism is making up for deficits on trading goods, service balance has been distinctly negative for years. Payments to the American tech giants for using their platforms already well exceeds tourism surplus. Japanese consumers enjoy shopping at Amazon’s website, searching through Google, listening to music on iPhones, watching movies and shows on Netflix. The government’s cloud infrastructure relies on Amazon, Microsoft, Alphabet (Google), Oracle and IBM. Information processing volumes continue to rise, rather exponentially, without facing capacity constraints, unlike tourism. Deficits in these services simply overwhelms tourism.
After all, Japan’s current account remains in black because of massive surplus in financial balance, ¥35 trillion in the latest FY. Japan is the largest holder of U.S. Treasury securities. Their coupon payments are flowing into the coffer of the Ministry of Finance. Having relocated its operation to other countries, Corporate Japan receives dividends from its overseas subsidiaries. Whether real cash inflow takes place or not is another matter, however. (It is often accounting credit to the HQs’ book in recent years.) Income from overseas investments are underpinning the external account. This is a display of a mature stage of a country. Japan has come a long way from a mercantilist country that fiercely exported goods.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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