The Japanese government expects 40 million foreign tourists in 2020, which would be a new record. Obviously, many of these people will be coming for the Olympics, but the government seems to think this wave with money to spend is going to be a regular and permanent thing, and they want to be prepared for a future where such people feel welcome. Legalizing casinos is part of this vision, but that plan was mostly formulated before the current foreign tourist boom was confirmed, and, in a real sense, the so-called integrated resorts that are being planned as excuses to allow casino gambling may not be as necessary as they once seemed, but it’s too late to stop now.
You can’t have too much for rich people to do, so the latest plan, reportedly the brainchild of Chief Cabinet Secretary Yoshihide Suga, is to build 50 luxury hotels by the mid-2020s. Why luxury hotels and not just regular hotels? Why 50? So far, nobody has really clarified the reasoning behind this ambitious scheme, but in the end the biggest unasked question is: Why the government? Japan is a resolutely capitalist country, reverent to the invisible hand of the market. And while Japan has been jokingly called the most socialist liberal democracy in the world owing to its schemes to game the economy through elaborate spending plans (which invariably help political vested interests), the idea that they would blatantly come up with such a concept to lure rich foreigners seems almost funny.
Some media are saying the scheme was suggested by David Atkinson, a former Goldman Sachs analyst and advisor to the Japan National Tourism Organization who has been promoting inbound tourism for years as a solution to Japan’s fiscal woes. In the interviews Atkinson has given over the years, he doesn’t mention luxury hotels exclusively. He mainly says that Japan needs more rooms of a less traditional sort—fewer ryokan and onsen inns and more conventional Western style hotels where foreign guests can feel comfortable and make their own plans. The trouble with traditional Japanese accommodations is that they tend to take the guesswork out of everything. You eat what they serve you when they serve you and even tell you when to go to bed.
But everyone knows that Japan has been caught short in terms of hotel rooms for the tourist boom, and have been talking about it for at least three years. The real question now is whether they need 50 hotels where only rich people can afford to stay. According to an article Atkinson wrote in 2017, Japan had 28 5-star hotels at the time, compared to 26 in Vietnam and 110 in Thailand. The reason, of course, is that in the years surveyed, Japan wasn’t yet a big tourism draw for either the rich or anyone else. Now that the numbers have increased exponentially, there is an acute need for more hotels and, naturally, since some of those people are going to have lots of money and normally demand deluxe service, they will need luxury hotels. But in other articles we also discovered one uncomfortable truth: Unlike most products and services that target the wealthy, luxury hotels don’t have high profit margins because their vacancy rates tend to be higher than lower-priced hotels. The hospitality business with the highest profit margin in Japan is Oriental Land, which manages the Disney Resorts, an enterprise that caters mainly to the middle class.
So maybe the hotel industry itself is not confident enough in the Japan inbound tourism boom to start building luxury hotels that are going to earn back their costs the way luxury hotels in traditionally luxe cities in Europe and North American do; or in cities that attract a lot of convention business; or, of course, gambling meccas. After all, Japan has had no trouble attracting foreign casino operators to its IR scheme, because those operators see a huge base of potential gamblers, meaning the Japanese people as a whole and not just the foreign high rollers the Japanese government is hoping to attract with the new shiny gambling dens. (For that matter the kind of high rollers the government does envision are probably Chinese, who likely would much rather patronize Macau or Singapore.)
So the mystery remains. According to a December 12 article in Harbor Business, Suga will use reserve government funds and loans from the Development Bank of Japan to pay for the project, though the article doesn’t go into detail with regard to exactly how this money will be spent. It seems doubtful that the government will actually build the hotels themselves, though it has done so in the past. In the 70s and 80s, when the emerging middle class found they had more leisure time and nothing to do, there was also a shortage of vacation-use accommodations, so the government in its way invested bubble-inflated money from pension funds, postal savings, and postal insurance sales to build hotels and inns ostensibly for civil servants and members of these particular plans (though, in truth, anyone could stay at them), and they eventually had a negative effect, driving existing private innkeepers out of business because they were cheaper. Now if you go to traditional resort areas, you’ll find these government-built facilities boarded up and moldering because people stopped going to them. Over the past several decades the government, or, at least, the privatized entities that inherited them from their former government-run incarnations, have tried to sell them off, and even in this suddenly brave new world of inbound tourism, they’re too superannuated to be renovated to their former glory. It’s easier, not to mention more palatable to the construction companies that form a good portion of the ruling party’s base, to tear them down and build new ones. But, again, luxury hotels?
For one thing the writer of the Harbor Business article, Yasuto Hayashi, thinks that there won’t be as many big spenders as Suga thinks. In Hayashi’s experience, the foreign tourists he meets lately are enthusiastic about Japan because it’s much cheaper than they expected, a function of currency exchange rates that will likely persist. In other words, these tourists are unusually well-off, and they seem truly interested in exploring Japanese culture, something the government should be happy about. In that regard, the government should encourage a more prosaic approach to sightseeing, which may contradict the spirit of Atkinson’s theory but not in a negative way. As Hayashi says, young Japanese are not patronizing eating out establishments that much these days, so these businesses, or, at least, the ones in major cities, count on foreign tourists. Naturally, some will be rich, but that’s not really the point. Japan should encourage visits by people of more modest means, people who want to experience what Japan is like for the people who live here, because that is the real value of experiencing a foreign country.
Even the tourism agency seems doubtful about Suga’s plan, since its main request is building up Japan’s convention business. Hayashi says that Japan is 7th in the world when it comes to attracting international conferences, which isn’t bad, but none of Japan’s cities are in the world’s top ten, and that’s where the real money is. Suga’s thinking may be that building more luxury hotels will increase Tokyo’s and Osaka’s convention and conference business, but that isn’t a given and doesn’t necessarily justify their construction since conventions and conference are seasonal and short-term. One industry expert told Hayashi that the number of hotel rooms in Kyoto increased by 7,000 over the past five years, and in Osaka the increase was 22,000. However, recently, an increasing number of these rooms are going vacant, and that means the normal dynamic of supply-and-demand is out of whack. Why would the government exacerbate this problem by building more hotel rooms that will likely go vacant because they are targeted at a minority of the visitors to Japan? If there is really a market for luxury hotel rooms, international hotel companies will figure it out and fill the perceived vacuum. They certainly know more about the market than the Japanese government does.