China’s rising middle class has made Japan a top travel destination, providing a lift to Japan’s inbound spending over the past decade. With concerns rising about slowing Chinese growth and a weakening yuan, we sat down with Goldman Sachs Research’s chief Japan economist, Naohiko Baba, to discuss the potential impact on Japan’s inbound tourism and growth.
Naohiko, can you give us a sense of the scale of Chinese tourism to Japan, and what’s driving this growth?
Naohiko Baba: Chinese represent the largest national group of visitors to Japan and the largest contributors to inbound spending by non-resident visitors. In 2017, for example, Chinese tourists spent around ¥1.2 trillion in Japan, 10 times what they spent in 2005. On a per-person basis too, their inbound spending far surpasses that by Koreans and Taiwanese, the next two biggest visitor groups.
There are multiple factors at work. Rising per-capita income in China appears to have made a notable long-term contribution. In recent years, the yuan’s appreciation against the yen, the relaxation of visa requirements, expansion of the range of goods exempt from consumption tax, and service by low-cost airlines to Japan have all fueled the rise in Chinese inbound tourism.
How significant is Chinese inbound spending for the Japanese economy?
NB: Since 2014, inbound spending has on average contributed around +0.1 percentage points to real GDP growth in Japan on a quarter-to-quarter annualized basis. Given that the country’s potential growth rate is, in our view, around 0.9%, and that Chinese account for around a third of Japan’s total inbound consumption, this adds up to a significant impact.
Foreign visitors to Japan in September dropped for the first time in more than five years. What do you see as the greatest risks to inbound spending from China today?
NB: Factor analysis suggests that the exchange rate and per-capita nominal GDP in China have the biggest influence on inbound consumption. We modelled China inbound consumption under certain downside risk scenarios and found that in our most severe scenario, which assumes further weakening of the Chinese yuan against the yen and per-capita GDP growth that is below IMF forecasts, Japan’s inbound spending from China declines an estimated 16% compared to our base-case scenario with the yuan’s depreciation the most important contributor by far.
Is there anything Japan can do to mitigate the impact of this possible falloff?
NB: Japan has policy levers such as easing visa requirements and expansion of consumption tax exemptions that have significant positive impacts on consumption in our analysis. Japan also has the potential to increase visitor numbers through enhancing infrastructure and capacity — more airport slots, accommodation facilities, WiFi spots and so forth. Given the fast-paced growth in China inbound spending so far, we think any decline should be viewed as only a temporary correction from a very high level.
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