If you’re thinking of coming to Japan for a spring break, you’d better book fast. Occupancy rates for Tokyo and Osaka hotels are at 22-year highs as big-spending Asian tourists flood into the country. The impact is felt not just at the high end. Asakusa, a downtown area fast becoming Tokyo’s new hipster central, is now a destination for foreign backpackers.
Shinzo Abe, Japan’s newly re-elected prime minister, is sometimes criticised for exacerbating tensions with China. In reality Abenomics, his reflationary policy package, is responsible for supercharged growth in the most personal form of interaction between the two countries. In the past year alone, visitor arrivals from mainland China rose 80 per cent.
A dozen years ago, total visitor arrivals to Japan were running at around 4m a year. This year they will top 13m and the government’s target of 20m by 2020 looks easily attainable. The key driver is the yen, which has depreciated from Y78 to Y120 against the dollar in just two years. In real trade-weighted terms the yen is at its cheapest since the advent of floating currencies in the early 1970s.
Tourists can change their holiday plans at the drop of a hat. Complex global businesses take years to reconfigure their supply chains and investment strategies. Yet that is exactly what is going to happen once companies are convinced that the new super-competitive yen is here to stay — and Mr Abe’s solid election victory on Sunday will help to provide such reassurance.
In recent years corporate Japan has held down investment in new facilities while boosting profit margins. Companies have also generated cumulative free cash flow equivalent to more than 60 per cent of gross domestic product — the other side of the ledger to the much discussed stock of government debt. With stalwarts in old economy sectors such as steel and shipbuilding now claiming to be the low-cost producers in the region, conditions are ripe for a multiyear capital investment boom driven by reshoring of production and, ultimately, labour shortages.
For a country not in crisis to experience a currency decline of such a scale is rare. In today’s world of low inflation it constitutes a pure gain in competitiveness. What we are witnessing is the mirror image of the 1990s Asian crisis, when countries with heavy dollar-denominated external debts were driven to the brink of bankruptcy by currency declines. Japan, in contrast, is experiencing a substantial strengthening of its solvency — thanks to the stock of net overseas financial assets, which make it the world’s largest creditor.
Add the change in the yen value of this treasure chest to a rise in the capitalisation of the Tokyo stock market and an increase in the value of urban real estate and you have a massive invisible strengthening of Japan’s balance sheet — not by reducing debt, but by boosting “equity.” If assets were at elevated levels this dynamic might be dangerous. But real estate and stock prices are barely higher today than 28 years ago.
Is Japan risking a currency war? Tokyo maintains it is not actively seeking a weaker currency, but massive quantitative easing must affect the yen’s exchange rate. The Bank of Japan was right to ignore complaints about higher import costs from some businessmen and politicians. It is impossible to shoot for an inflation target while simultaneously trying to rein in the currency.
But currency weakness does not necessarily improve the trade balance, as we saw in the wake of the Plaza Accord of 1985. The dollar halved versus the yen and Deutschmark, but with little ultimate effect on the US trade deficit. Likewise aggressive Japanese reflation might have the greater impact on domestic demand.
In the meantime everyone from gap-year students to executive travellers can enjoy the delights that Japan has to offer at bargain basement prices — provided they can get a reservation.
The writer is a Tokyo-based analyst at Arcus Research
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