Standard Life Investments

Weekly Economic Briefing

Japan & Developed Asia

Tourism as a weapon


The tourism industry is not often a sector dragged into international disputes. However, the Chinese decision to ban the sale of group travel packages in retaliation for South Korea’s deployment of the US-backed THAAD missile system is designed to demonstrate the nation’s economic might. Will it work? The initial reaction has been significant, with Chinese tourist arrivals to Korea dropping 61.5% and 66.6% year-on-year in April and May respectively. At the current run rate, one could envisage a material impact on Korean GDP as a result. Revenues from tourism as accounted for in the balance of payments are estimated at 1.2% of GDP. With 46.8% of overseas visitors coming from China, we estimate Chinese tourism revenues at approximately 0.5% GDP. If this was to decline 60% in 2017, it could shave close to 0.3 percentage points off growth. In reality, we are already seeing the tourism sector display is fabled resilience. In Jeju Island, one of the nation’s most popular destinations, tourists from China accounted for 84% of foreign visitors last year. While Chinese visitors have dropped sharply, the Jeju Tourism Association says a rise in opportunistic domestic tourists have offset the decline. They estimate that 12 million of the 15.8 million tourists to visit the island in 2016 were Korean. A campaign to attract more tourists from elsewhere in Asia has also been launched. While these coping mechanisms may dampen the blow, President Moon may come under pressure to strike a more conciliatory tone once an ongoing re-evaluation of the THAAD system is completed.

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Elsewhere, Japan has seen a rapid acceleration in foreign visitors under the Abe administration, with overseas visitors topping 24.0 million in 2016. That compares to just 8.4 million in 2012, the year Abe entered office. The government has been quick to claim responsibility, highlighting investment in tourism infrastructure and an easing of visa restrictions. This characterisation seems disingenuous. One explanation for the rapid growth appears to be the low base. Japan has lagged regional counterparts with overseas visitors in 2012 standing at 11.1 million in Korea, 14.5 million in Singapore and 48.6 million in Hong Kong (with more than 30 million from mainland China). Another factor driving the growth of tourism over the period is the yen, which has dropped 40% over the past five years against the dollar. The growth of Chinese tourists appears particularly sensitive to currency trends, with the number of visitors stabilising since early 2016, in line with the relative currency movements. By contrast, visitors from Korea have continued to grow, and now represent the largest source of foreign arrivals. The average spend per tourist has also closely follows the USD-JPY, topping out in September 2015 before falling more recently. Interestingly, the highest spenders on a per capita basis are the Australians (see Chart 8). This reflects a hefty budget for accommodation, a pattern repeated across western economies. Despite the growth both in numbers and aggregate spending, it is clear that Japan’s tourism industry is still playing catch-up. The direct contribution of tourism is estimated at 2.4% compared to an OECD average of 4.1% (see Chart 9). The trend is reversed when one examines employment, with employment in tourism 6.9% of total employment compared to an OECD average of 5.9%. The unbalanced story confirms suspicions that Abe’s ability to mobilise the workforce has not been accompanied by a willingness to implement productivity-enhancing reforms capable of driving growth higher.

Govinda Finn, Japan and Developed Asia Economist