Market monitor: Japan

Economic overview

Japan was one of the original Asian tiger economies. From the 1960s to the start of the 1990s, its gross domestic product growth was strong enough to establish Japan as the world’s third-largest economy (after the U.S. and China). Since then, Japan has struggled through more than two decades of economic underperformance. Surplus capacity, particularly in manufacturing and construction, led to persistent deflation. High levels of bad debt made banks reluctant to lend, reducing companies’ options for funding investment.

Export volumes rose in 2016, yet growth was weak. Japan’s economy expanded just 1% in the third quarter, compared to the year before. Domestic demand remains sluggish; household spending is growing modestly and business investment is declining.

Since Donald Trump’s U.S. presidential win, the yen has depreciated by around 6% against the U.S. dollar. It could fall more in 2017 if U.S. interest rates rise and Trump ushers through changes to trade policies. The upside: A weaker yen should keep boosting Japanese exports.

Business travel industry insight

Domestic travelers dominate Japan’s business travel market, accounting for 93% of the $70 billion spent on trips in 2015, according to Tourism Economics. Domestic business travel growth is likely to remain around 1% annually through 2020. International travel promises stronger growth of close to 7% per year. While this segment accounts for just 7% of total spending, it’s still worth more than $5 billion per year to travel suppliers.

Meanwhile, overseas tourists are flocking to Japan. Since 2010, annual international visitor numbers have soared by 180% to more than 24 million. By comparison, the number of Japanese taking traveling abroad has grown by just 5% in this period. Arrivals from China, Hong Kong and Taiwan are predicted to remain the main source of tourism growth through 2020.

Japan’s mature air travel market increased by no more than 1% during most of 2016. Airlines succeed by managing capacity well. Low-cost carriers are well established. Eight LCCs offer domestic services; they account for about a fifth of Tokyo’s airline capacity (Haneda and Narita airports). Nationally, their share is just 10%.

A combination of strong growth in inbound visitors and chronic undersupply in hotel rooms have boosted investor interest in Japan’s accommodation market. As the 2020 Olympic Games approach, most international chains are focused on Tokyo—in particular on luxury properties in the city. But as tourists increase travel to secondary cities, hotel developers are paying attention. In 2017, more than a third of new hotel rooms will open outside primary cities.

Opportunities

  • The depreciation of the yen is making Japan a more affordable destination, particularly for U.S. travelers. It also makes the country more attractive to foreign business investors.
  • Japan’s low-cost carriers have a strong opportunity to expand outside of the Tokyo market.  Overseas LCCs continue to add international flights to Japan. Low-cost expansion should mean lower short-haul fares for travelers.
  • Hotel chains are venturing beyond the core cities of Tokyo, Osaka and Nagoya, increasing accommodation options for travelers visiting smaller cities.

Challenges

  • Almost 20% of Japan’s goods exports go to China. A sharper slowdown in China’s economy could push Japan back into recession.
  • Competition in Japan’s domestic air travel market is limited. Japan Air Lines (JAL) and All Nippon Airways (ANA) have interests in five of the country’s low-cost carriers and essentially enjoy a duopoly in the wider market.
  • Strong demand and constrained supply have led to significant increases in hotel average daily rates. Business travel consultancy Advito expects Japanese hotels to raise rates 4-6% in 2017.

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