Weak yen to encourage travel; no full recovery without China
After more than two years of strict border controls due to Covid-19, Japan restored visa-free travel to 68 countries on Tuesday.
Maki Nakamura | Digital Vision | Getty Images
Japanese yen’The depreciation of the US dollar has caused some concern in Japan, but analysts say it could encourage more travelers to revisit the country, though they say there won’t be a significant recovery in the tourism sector without the return of Chinese tourists.
After more than two years of strict border controls due to Covid, Japan restored visa-free travel to 68 countries on Tuesday.
Package tours are no longer needed, This is reported by the Japan National Tourism Organization (JNTO).
The daily entry limit of 50,000 people and the PCR test on arrival at the airport have been lifted. However, according to the JNTO, travelers from all countries and regions are still required to provide a negative Covid test certificate or proof of vaccination.
With the easing of restrictions and the depreciation of the yen, tourism to the country will quickly return, especially from Asia, Jesper Coll, director of financial services firm Monex Group, told CNBC.
Call said that while travelers from Europe and the US are playing a major role in Japan’s tourism recovery, “the bulk of the enthusiasm and most of the travel” still comes from countries like Singapore, the Philippines and Thailand.
“The cheapness of the yen obviously increases the likelihood that tourism will make a significant contribution to the economy,” Call said. “As restrictions are lifted and inbound flight capacity increases, I expect we will see very, very rapid growth in inbound spending and inbound tourism.”
Japan hosted 32 million foreign visitors in 2019, and they spent about 5 trillion yen, according to a September report by Goldman Sachs, but entry costs are currently only a tenth of that amount.
The investment bank has calculated that entry costs could reach 6.6 trillion yen ($45.2 billion) after a year of full reopening as travelers are forced to spend more due to the weak yen.
“Our estimate points to potentially higher inward spending of 6.6 trillion yen (per annum) after a full reopening compared to the pre-pandemic level of 5 trillion yen, helped in part by a weak yen,” the note says.
The Japanese currency fell to a new 24-year low and was at 146.98 against the US dollar during London deals on Wednesday.
Japanese officials intervened in the forex market in September, when the dollar-yen hit 145.9..
“I don’t think the yen was as cheap as it is now in living memory,” Darren Tay, Japan economist at Capital Economics, told CNBC’s Squawk Box Asia on Tuesday. “Tourists have already demanded the opening of the borders… So I think that the weak yen will serve as another motivating factor” for them to go to Japan again.
Although airfare to Japan has risen since the announcement, tourists will still get bang for their buck, Call said.
“Here in Japan, you can eat twice as many hamburgers, twice as much sushi per dollar compared to the United States, and even compared to the rest of Asia,” he added.
Chinese tourists ‘hold the key’
The outlook for Japan’s tourism recovery looks promising, but “the overall impact on Japan’s economy may not be positive” as Chinese tourists have yet to return, Tay said.
“Chinese tourists actually make up the majority of what foreign tourists spent in 2019… They are still on a zero Covid strategy, so they won’t be returning anytime soon,” he said.
Goldman Sachs said Chinese tourists, who made up 30% of foreign visitors to Japan in 2019, may only return in the second quarter of 2023.
When China fully reopens, Chinese visitors’ inbound spending could increase from 1.8 trillion yen in 2019 to 2.6 trillion yen, or 0.5% of Japan’s gross domestic product, according to Yuriko Tanaka, an economist at Goldman Sachs.
“Chinese visitors hold the key to recovering incoming spending in good faith,” Tanaka said.
Without visitors from China, it could be some time before entry costs to Japan return to pre-pandemic levels, Call said. But strong demand from the rest of Asia could see incoming spending “relatively quickly” return to more than $3 trillion by March 2023.
Forecast for the yen
As markets expect the US Federal Reserve to raise interest rates by 75 basis points in November, the yen will continue to weaken as the dollar continues to strengthen, Call said.
“You have a growing interest rate differential [between Japan and the U.S.], and the Federal Reserve is not finished yet. At least one more interest rate hike is expected,” he said.
He added that the yen could further weaken to 155 levels, only to strengthen next spring – and this will not be the result of Japan’s actions, but signals from the Fed that it “has put on the brakes enough.”