Why Japan’s hotel operators have nothing to fear from tourism backlash

For a country whose currency was once perceived by many global investors as a safe haven, the Japanese yen is in dire straits. Between March 2022 and July 2024, the yen plunged 40 per cent to its lowest level against the US dollar since 1986. Since then, Japan’s currency has been volatile, buffeted by external and domestic cross-currents.

The uncertain outlook for the yen is partly attributable to the acute policy dilemmas facing the Bank of Japan. The country’s central bank is under pressure to continue raising interest rates as inflation lingers above the central bank’s 2 per cent target.

While further rises in borrowing costs would help strengthen the yen, the unexpected election of Sanae Takaichi, an arch-conservative politician who favours monetary and fiscal stimulus, as leader of the ruling Liberal Democratic Party (LDP) has added to the uncertainty over the central bank’s policy stance.

Although Takaichi, who is likely to become Japan’s next prime minister, has toned down her criticism of monetary tightening, the yen has fallen 3 per cent versus the US dollar since her election as LDP president on October 4.

A persistently weak currency is prolonging the cost-of-living crisis that is partly responsible for the collapse in support for the LDP. Since Japan relies heavily on imported raw materials, food and energy, the collapse in the yen has led to dramatic price increases, sapping consumers’ purchasing power amid a decline in real wages.

However, the cheap yen has also made Japan a magnet for overseas tourists, underpinning the strong performance of the country’s hotel sector that has become one of the drivers of Asia’s commercial property investment market. Last year, Japan accounted for more than half of hotel transaction volumes in the Asia-Pacific, according to MSCI data.

Annual foreign visitor arrivals soared to a record-breaking 37 million last year, up from less than 20 million in 2015. The government, moreover, is targeting a staggering 60 million annual visitors by 2030. In the first four months of this year, foreign travellers accounted for 29 per cent of overnight stays in hotels, compared with a yearly average of 16 per cent in 2015-19.

The massive post-pandemic influx of overseas tourists has come as a shock to many Japanese, challenging the nation’s tradition of honouring guests and contributing to a backlash against overtourism. Many Japanese bristle at excessive crowding, rising prices and unaffordable hotel rooms, exacerbated by the experience of not being able to afford to travel abroad while overseas tourists flood into the country and delight in the yen’s weakness.

The impact of the cheap yen has posed a challenge to the hotel market itself. While the foreign tourist boom has contributed greatly to the strong performance of the sector – average daily rates and revenue per available room are at least 40 per cent higher than in 2019 – operating and construction costs have risen sharply, exacerbated by acute labour shortages.

Many Japanese business travellers, moreover, are being priced out of upscale and luxury segments of the hotel market. Colliers said there are “cases where the cost of accommodation for domestic business trips exceeds the company’s budget”.

However, while unease about the cheap yen and overtourism is bound to intensify, Japan is likely to remain one of the world’s best-performing hotel markets. First, although operating expenses have increased steeply, the sheer scale and strength of demand, powered by overseas tourists, are overriding all other determinants of performance.

In Tokyo, revenue per available room in the first four months of 2025 was 54 per cent higher than in 2019 because of the sharp rise in average daily rates, according to CBRE data. Affordability pressures, moreover, are of little consequence for the time being. “There are no signs demand is softening due to the rate increases – quite the contrary,” said Ananth Ramchandran, the head of advisory and strategic transactions for hotels and hospitality in Asia, at CBRE.

Second, the surge in construction costs and severe labour shortages have caused a sharp slowdown in the supply of new hotels. According to CBRE, the development pipeline accounts for just 3 per cent of total rooms, the lowest ratio among the leading markets in the Asia-Pacific. “There has been a significant tail-off in new development,” said Andy Hurfurt, managing director of institutional investment advisory at Savills in Tokyo.

The limited supply is a boon for existing hotels in attractive locations, presenting “compelling opportunities for innovative operators and developers willing to respond to evolving market trends”, according to Savills.

Third, the backlash against overtourism is concentrated in the well-travelled “golden route” of Tokyo, Kyoto and Osaka, and is more of an issue for the short-term rental market. However, Japan is a big country with vast tourist potential in rural areas that is only beginning to be tapped.

The hotel market, moreover, remains extremely fragmented. Even the big cities have some of the lowest rates of penetration by the leading global brands such as Marriott and Hilton, creating attractive investment opportunities.

“Investors have shown you can outperform by boosting occupancy and rates with globally branded assets,” said Shai Greenberg, senior director, head of international capital, Japan capital markets, at JLL.

Takaichi is unlikely to give a fillip to the yen, prolonging the cost-of-living crisis that is fuelling the backlash against tourism. Yet even against this bleak political backdrop, Japan’s hotel operators and investors have plenty of reasons to be optimistic about the outlook for the market.

Nicholas Spiro