Terrie's Take 802 (Tourism Edition) -- Inbound Tourists Driving Domestic Profits

Terrie's Take terrie at mailman.japaninc.com
Mon May 4 12:02:49 JST 2015

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan. 

Tourism Sector Edition Sunday, May 03, 2015, Issue No. 802

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Two very interesting and contrasting news items came out about the 
Japanese economy this week. On the one hand, household spending fell by 
a record 10.6% in March compared with March of 2014, and on the other 
hand, about 20% of Japan's services (i.e., non-manufacturing) companies 
are enjoying record profits. It's pretty clear that Abenomics is still 
inducing severe polarization in the economy, but for once this may not 
be a bad thing, because those companies newly reporting profits may be 
more willing to trickle down some of their profits than have the 
traditional exporters.

Firstly, the household spending collapse. To be fair, the minus 10.6% 
headline is largely due to the fact that in March of last year, 
consumers were busy making major purchases ahead of the 3% increase in 
consumption tax to 8%. In reality, the March 2015 decline was just 0.3% 
more the month before -- although on an annual basis it is still cause 
for some alarm. It's pretty obvious that without consumers starting to 
spend again, the economy isn't going to make a meaningful recovery. 
Private consumption in Japan accounts for about 60% of the nation's GDP.

This bad news has caused the Bank of Japan to lower its inflation 
forecast, delaying its target of 2% annual inflation by a year, to 
sometime in 2016. Analysts are saying that the BOJ back down is due to 
two major issues -- falling crude oil prices, which are only just now 
getting passed on to happy consumers, and sluggish consumer spending. No 
meaningful inflation means lots of things to the economy, but the 
primary effect is simply that without an incentive to do otherwise, 
consumers will continue to keep wallets closed.

Secondly, on the other side of the coin, a most interesting phenomenon 
is starting to take place. Companies that are not typically exporters 
are now starting to enjoy record earnings. Thanks to the cheap yen, and 
yet not because they are sending products overseas, about 20% of local 
mega-corporations and their supply chains are reporting profit increases 
of 7%-10%. Most of this good news is happening because of the increase 
in foreign tourists and the accompanying surge in infrastructure 
improvements that local investors are making to support those extra 
tourists (i.e., real estate, transportation, food, IT, etc.).

So while the locals are spending less, the foreign tourists and the 
anticipation of more of them are more than making up for the shortfall.

[Continued below...]

--------- Help Us Test New No-Network Maps App ------------

Japan Travel is getting ready to launch its first iPhone app, which will 
be a No-Network mapping tool. The tool lets foreign tourists use their 
smart phones to prepare Google-like maps and find their way around Japan 
without having a local network connection. Testing will require you to 
download the application (you will need an iPhone) and to use it next 
time you go out for a walk. Estimated test time and reporting back any 
bugs will be about 30 minutes. For testers who are pre-registered on 
www.japantravel.com, you will be paid 500 points after you report back 
in from the test. We are hoping to have about 100 people test the 
application, so please help us if you can.

To register as a tester, send an email to info at metroworks.co.jp. To 
register for Japan Travel, go to: http://en.japantravel.com/join

As a concrete example, train companies all over the country are seeing 
significant increases in profits. JR East enjoyed a profit surge of 9% 
to a record high of JPY362bn, thanks to all the JR Rail Passes it and 
the rest of the group is selling. Shinkansen earnings in particular rose 
to a record JPY521.2bn. Private train operators such as Odakyu in 
southwest Tokyo and Kintetsu Group in the Kansai are also experiencing 
strong results. Kintetsu is saying sales are up 10% and net profit up 7%.

What this means is that whereas exporters are not really obliged to 
share their profits with Japanese workers, because relatively speaking 
much of their exposure to the costs and demands of workers is outside of 
Japan, domestic services companies are 100% about their people and their 
ability to leverage local interpersonal relationships. Thus, with the 
current tight labor market and increasing demand for capable employees, 
domestic companies are much more exposed to peer and societal pressure, 
and we believe it is only a matter of time before their increasing 
profits start to find their way to the employees and their families.

Granted, this is a small effect so far -- tourism appears to be 
benefiting only about 20% of Japanese domestic listed companies. But we 
think the halo will broaden as more companies start to realize they are 
missing out on the action and realign their activities for this new 
source of income.

Greater inbound tourism as a side effect of the cheap yen cannot be lost 
on the Abe government, and offers the LDP respite from their earlier 
mistaken premise that the cheap yen would somehow return Japan to being 
a manufacturing superpower. Yes, there has been a pick up in exports, 
but with so many manufacturers already committed to being offshore, and 
so many of them not really believing that it's worth returning 
production back to Japan, the cheap yen is being wasted on the 
manufacturing sector. (OK, Toyota is an exception, but there are not so 
many "Toyota's" in Japan.)

Currently the Nikkei puts overall spending by foreigners in Japan, which 
already exceeds by a wide margin the spending by Japanese going abroad, 
at about 5% of all travel spending by Japanese in their own country. 
With inbound tourism likely to overshoot 20m goal well before 2020, we 
expect that visitor spending will probably rise to around 8% of all 
domestic travel spending by 2020 -- or about 1% of GDP. Given this, 
there is good incentive for the government and the BOJ to continue their 
yen-weakening activities.

There has been talk about the BOJ being reluctant to apply more 
quantitative easing because of the international community's perception 
that Japan is only a hair's breadth away from deliberate currency 
manipulation. Indeed, there is a fine line between QE and active 
manipulation of the markets. However, we think it is inevitable in the 
face of continuing inflation decline that there will have to be another 
stimulative boost by this time next year. It will be a risk that the 
government will be willing to take, and as a result, the cheap yen and 
more tourists will be with us for a while to come.

What's important with tourist spending versus mere macroeconomics is 
that it's not only the big guys who will get a piece of the tourism pie. 
Instead, those smaller communities appealing to FIT repeat travelers, 
particularly Taiwanese, HKers, and Singaporeans, will start to see a 
surge in their local economies as well. The basic idea is: the more 
someone visits Japan, the more they want to discover "authentic" Japan, 
and the more likely it is that they will journey further off the beaten 
path. This is an exciting prospect, and offers hope to rural economies 
that have been gutted by population loss and job loss in the last 20 years.

We have mentioned before in our Takes that the domestic infrastructure 
sector most likely to benefit most from tourism expansion is Real 
Estate. Proof that tourism can lift all ships can be found in increasing 
announcements of hotel acquisitions and construction outside the major 
cities. For example, property developer Hulic announced last week that 
it will buy a prestigious ryokan in Hakone, called Suishoen, and another 
in Atami, called Fufu. Hulic is going to pay JPY4bn for the two 
out-of-the-way properties, which is a strong price for about 40 upscale 
rooms. Hulic clearly has its eye on the foreign customer sector, as 
rooms cost JPY100,000/night for two.

Lastly, may be you noticed the ad above about app testers? Basically 
we're hoping to recruit about 100 people from Terrie's Take readers to 
help us with this. Very simple procedure: register with us, receive 
instructions on how to download, try out the app, let us know what we 
could be doing better, collect points and exchange for rewards. The app 
will be released to the public in June, and will be completely free. The 
reason we are launching it is that while there are plenty of online maps 
available, not one of them works if you have no network connection. 
Connectivity is clearly a problem for any tourist who doesn't have a 
local SIM, and/or who doesn't want to pay exorbitant roaming charges. 
Our app solves this problem. You can sign up at info at metroworks.co.jp. 
Thanks so much for your support.

...The information janitors/

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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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