Terrie's Take 814 (Tourism Edition) -- Will the Inbound Tourism Boom Continue?

Terrie's Take terrie at mailman.japaninc.com
Sun Jul 26 23:22:50 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, July 26, 2015, Issue No. 814

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+++ Will the Inbound Tourism Boom Continue?

One of the questions I'm most frequently asked by foreign investors 
(real estate investors in particular), is whether the current rise in 
foreign tourist numbers in Japan can continue. It is true that in the 
last four years, the number of tourists entering the country has risen 
at a torrid pace, literally doubling in that period. Indeed, for the 
first time in 44 years, in the first half of 2015 there were more 
inbound tourists than Japanese going overseas. The forecast for inbound 
tourists for 2015 is now around 18m, so indeed this pace of growth is 
going to be hard to top.

However, perhaps those investors are asking the wrong question. A more 
appropriate one would be, "Will there be sufficient extra tourists over 
the next few years that my real estate investment will make me money?" 
To this question, my answer is a strong "Yes!" The reason is that with 
Japan receiving this many inbound tourists, its existing hotels and 
tourist-serving infrastructure is pretty much maxed out, and supporting 
even a modest further increase is going to need a lot more significant 
investment than has been the case so far. Therefore, you don't need 
another 18m in the next five years to create an ongoing favorable 
investment climate. You really only need the current numbers plus a 
little bit of alpha.

Our guess is that Japan will go on to attract more than the target 20m 
inbound travelers by 2020. In fact, we wouldn't be surprised if we 
experience an influx of more like 25m+ by 2020. Why? Because as has been 
demonstrated amply in the last three years, the Japanese government is 
able to turn on the tourist inflow spigots through some relatively 
simple steps, such as easier visas, ongoing cheap yen, and tax 
givebacks. There are still plenty of countries near Japan whose citizens 
don't have easy access to travel here although they'd come if they could 
-- think China, Vietnam, Philippines, and everywhere in Asia west of 
Thailand. OK, yes, in the last couple of months there have been some 
easing for China, Vietnam, and the Philippines, but there is still 
plenty of distance to go.

Furthermore, there are also plenty of tax gimmicks available to 
lawmakers as well, as they help Japan become the new shopping mecca for 
Asia, just as Hong Kong and Singapore used to be before they got too 

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As most readers will no doubt know, on October 1st, 2014, Japan extended 
its consumption tax-free program for tourists to include food, medicine, 
and cosmetics. This last category was a smart move, because cosmetics by 
value and volume is one of the biggest purchase segments for inbound 
foreign tourists. Actually, the whole tax scheme itself is quite smart. 
If you want to buy consumables (food, cosmetics, etc.) you have to spend 
in total more than JPY5,000 and less than JPY500,000 all on the same 
day. If non-consumables (appliances, apparel, etc.) then more than 
JPY10,000 on the same day. This prompts tourists to go on spending 
sprees to go over the minimum limit, and to do all their buying at the 
same time. If there is one thing the Japanese understand, it's the 
dynamics of herd instinct.

What isn't smart about the new system is that it's painful for the 
stores registering for tax-free status and processing the purchasers' 
paperwork. Lines of tired tourists waiting for harried shop assistants 
to complete too many unnecessary forms created by bureaucrats unable to 
think of IT and automation has meant a bumpy start for the program. It 
has caused most smaller stores to put off registering as tax-free 
outlets, and for big ones to find themselves with a double-edged sword 
-- dramatically increased sales tempered with extra manpower and 
reporting costs as well.

Luckily, while the bureaucrats have been clueless about the human 
traffic jams they are causing, Japan's savvy retailers have stepped in 
and are trying to make things easier. Take the Seven-Eleven convenience 
store chain for example. The company decided to streamline the 
cumbersome tax counter process by setting up special tax counters and 
using some IT. Now customers can simply show their passports and sign a 
slip when buying tax-free. OK, the transaction time including bagging 
(in special tamper-proof bags) still takes about five minutes, but this 
is a third of the time it used to take. Furthermore, since the average 
sales of tax-free products is about 10% of their average store sales, 
the extra effort is clearly worth it.

Elsewhere around the nation such as in smaller cities, groups of shops 
are nominating a single, central store, usually the local department 
store, to act as the tax counter, and tourists are directed there to get 
a refund on their purchases. While the implementation of this idea 
hasn't been smooth or universally popular, it has nonetheless resulted 
in the number of stores around the nation offering tax-free shopping to 
increase to about 18,779 -- double that of last year and 400% more than 
in 2012.

Personally I wonder why the government doesn't just bite the bullet and 
get rid of all the cumbersome paperwork. This could be achieved by 
having people register their passports BEFORE they arrive in Japan, then 
downloading an application to their smartphones that contains a personal 
photo, the passport details, and a unique shopper number. Those 
travelers not having smartphones could still stick to the paper system. 
Such an application, whether connected by WiFi or not, could generate a 
unique code to be scanned by the retailer's POS system, producing all 
the spending and tax data a bureaucrat could ever need, with nary a 
piece of paper in sight.

The other thing they need to do away with is the tamper-proof bag 
system. While I understand that they want to restrict purchases to 
genuine tourists and not have leakage of tax-free goods to the local 
population, I think it is an unnecessary requirement that is severely 
hindering what could otherwise be a very successful tourist draw card in 
the future. Firstly, having to use special bags and sealing is beyond 
smaller retailers, so until the government licenses someone to resell 
them, it's a hurdle. Secondly, as the South Koreans have already proven 
with their own tax-free system and lack of need for such bags, most 
foreign tourists do not have a strong personal network in-country and 
therefore are unlikely to "leak" tax-free goods to citizens. Yes, there 
could be some black market activity, but it is likely to be negligible 
because most tourists don't want to wind up in a Japanese jail. Instead, 
those intent on breaking the law will simply create fake bags and tax slips.

Instead, on the upside, if Japan was to let its visitors open their 
purchases while still at their hotel, the women (OK, and many guys) 
might like their new cosmetics so much that they will go back and buy 

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

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