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Japan: Potential tourism boom could bring investment opportunities

Charu Chanana

Head of FX Strategy

Summary:  Japan’s relaxation of border curbs and reopening this week is well timed for a potential year-end tourism boom, with upswing in both domestic and international travellers likely. Pent-up demand and a weak yen further help to improve Japan’s position as an attractive destination, although the lack of Chinese tourists will mean that a full recovery has to wait for much longer. Still, there appears to be potential investment opportunity in key travel and tourism related stocks and sectors such as airline, transit services, travel agencies and hotel REITs.

The mega border reopening

Japan is reopening its borders after three years, allowing visa-free and agent-free travel. Effective 11 October, the Japanese government has effectively removed all border controls that were in place since the Covid outbreak. These include:

  1. No visa requirements for foreign nationals entering Japan for business/employment for less than three months, short-stay tourism, and long stays. Visa exemptions will resume for 68 countries/regions
  2. No testing or quarantine requirements for visitors from most countries
  3. Removed the daily entry cap on new visitors, which was adjusted from 20,000 to 50,000 on 7 September
  4. Started to allow unguided package tours for visitors from all, as against only packaged tours that were allowed since June

These measures will open the doors to Japan tourism for a world of travellers, especially ahead of the key upcoming year-end travel season. The only obstacle now remaining is potentially proof of vaccination that is still required to enter Japan, while many European countries have removed that requirement as well. Still, given high levels of vaccination rates globally, it is a small obstacle and the intent is clear with PM Kishida pursuing a “living with COVID” policy of weathering the surge in Covid cases without imposing restrictions on businesses or mobility.

Domestic tourism to provide a boost

There are still a few considerations for Japanese tourists to travel abroad, and the authorities are positioning well to take advantage of that as well. Japanese people are faced with the high cost of travel due to the weak yen and high fuel costs, and the conservativeness makes them hesitant as well with borders just opening up. The government had previously launched a prefectural discount program to promote travel within one’s own prefecture, but from 11 October it has expanded that to a national travel discount program to stimulate nationwide domestic tourism demand, as well as an event discount program that lowers the cost of entrance to events. These two new discount programs are scheduled to run through late December.

Pent up demand and weak yen make Japan an attractive tourist destination

Even almost a year after Asia started to open up from the pandemic curbs, there is still pent-up demand as most people took the first trip back home and are now waiting to explore. Japan remains the top travel destination for Singaporeans, according to a May 2022 survey by YouGov. Moreover, with the Japanese yen near 24-year lows against the US dollar, and SGDJPY at record highs above 100, the destination is even more attractive for bargain hunters especially with airline prices catching a bid from high demand and high fuel prices. Bank of Japan’s policy divergence to the Fed suggests the weakness in the yen can continue as US yields continue to push further higher this quarter. It is worth noting that Japan’s visitor arrivals tripled to 32 million in 2013-19, when the yen fell more than 20%.

Investment opportunities in Asia’s Q4 tourism boom

In 2019, Chinese visitors to Japan were almost 10 million, around 30% of the total. Therefore, in the absence of a Chinese border reopening, a full recovery may be some time off. But a weak yen can prop up duty-free spending, covering up for some of the shortfalls created by the lack of Chinese tourists. An overall pickup in travel spending is also likely to be seen in Asia, with many other countries taking mini-steps towards living with Covid and a full reopening.

For Japan, this brings investment potential in a range of different businesses. Airport terminals like Tokyo Narita and Haneda can tap into a large share of domestic and international travellers. The Haneda terminal also has a high domestic traffic mix and a 50% or more local resident international passenger base, which can benefit from Japan's pent-up travel demand. Airlines such as ANA and Japan Airlines, as well as railways such as JR West and JR Kyushu could also witness increased passenger traffic, while travel agencies like HIS and entertainment facilities like Oriental Land which operates the Tokyo Disney Resort may benefit as well. Higher hotel occupancy could mean potential upside for hotel REITs such as Japan Hotel REIT. Retail and restaurant chains such as Pan Pacific, Takashimaya, Isetan Mitsokoshi, as well as consumer goods companies such as Shiseido , Kao, Kose may potentially need to wait for the return of the Chinese tourists.

Source: Bloomberg, Saxo Markets

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