Examining demand and hotel pricing in Japan as it fully reopens to mass tourism

Mt Fuji landscape japan

Japan, like much of Asia Pacific, decided on a policy of isolationism when it came to the pandemic, which has resulted in the best part of two-and-a-half years of low-to-no travel.

Furthermore, the Japanese government has been one of the most cautious in reopening its nation to international travel. 

But, the tide is now turning. According to The Japan Times: “Japan will allow visa-free, independent tourism and abolish its daily arrival cap as of Oct. 11, Prime Minister Fumio Kishida said Thursday, marking a major policy shift.”

Strict entry requirements started to be eased for tourists this summer as part of a phased plan but inbound numbers are still a fraction of what they once were. Thus, this most recent announcement, along with the re-introduction of the nationwide travel discount program is most welcome news for Japan’s hoteliers.

It will probably leave the Japanese travel and hospitality industries asking if these changes back towards more openness will finally have a positive impact and when can they expect a return to normality?

A gradual reopening but not a full recovery just yet

It has been a slow reopening when it comes to inbound tourism for Japan. The country’s borders have only recently been opened, in July of this year. That loosening of restrictions represented a tiny sliver of the pre-pandemic potential, putting the rebound of inbound tourism far behind most other developed nations. 

In July, the entry policy concession allowed tour group bookings from a little under 100 countries, subject to vaccine and testing requirements, and with a daily limit on foreign arrivals of 20,000. 

This was revised in September, with the daily limit raised to 50,000 and tourists allowed to book independently. This is still a drop in the ocean compared to before the virus strangled global tourism.  

The numbers don’t lie on the effect of this. The Japanese National Tourism Agency (JNTO) reported that international visitor arrivals were down 96.7% in the seven months to July when compared to the same period in 2019.

Pricing recovery in Japanese destinations - 2019 vs 2022

Destinations comparison Japan cities

These restrictive entry policies are reflected in room pricing across Japan’s cities, where the rates remain far below where they once were. Without even adjusting for inflation, prices in July 2022 remained between 26.4% down in Kyoto to 38.6% in Tokyo compared to three years prior. 

Only Okinawa posted a month of positive pricing throughout 2022, briefly exceeding in January. This reflects the popularity of the destination with domestic tourists over the key New Year travel period, but otherwise it is clear that domestic demand is not enough to support robust pricing in the travel and tourism market in most locations. 

This fits with the fact that by this time in 2019 more than 20 million international arrivals had been recorded, compared to well under a million over the first seven months of this year. 

Pricing recovery in Tokyo and major international cities - 2019 vs 2022

Destinations comparison global cities

To contextualize this pricing weakness, it is worth putting Tokyo next to other major global cities. Comparing rates posted in the other command centers of the global economy of London and New York, alongside Northeast Asian peers, Tokyo is by far the worst performer. 

New York and London are now comfortably posting prices above 2019 levels. Even Shanghai and Beijing, which have been hit by substantial, harsh lockdowns over the last year, lie close to pre-pandemic rates. Tokyo rooms, on the other hand, currently sit at a nearly 40% discount compared to pre-pandemic in nominal terms.

However, with the latest announcement moving Japan to a fully-fledged reopening, there is definitely growing optimism for the rest of 2022 and 2023, as we will see later in this piece.

Japan’s domestic tourism market dictates

With domestic travellers dictating the terms of the Japanese hospitality market, we can see the impact of this on overall booking patterns. 

Japanese citizens are infamous for not taking a great deal of holiday time, and this has made the major national holidays absolutely critical for hoteliers. 

OTA/Metasearch lead time evolution in Kyoto

Kyoto OTA Meta Search Lead Time Evolution

We can clearly see two of those moments in the data, where we have sudden spikes in short lead time searches for hotels on online travel agency (OTA) and metasearch sites around the Golden Week holidays in late April/early May and then for Obon period on mid-August across the major cities in our dataset. 

Looking at Kyoto, searches with lead times of less than a week spike to 67% of the total volume at the start of May, for example. 

We can expect the importance and effect of domestic travel to diminish over time, but the Japanese government has been slow to make changes. 

Now that Japan has removed the daily cap and is waiving visas for those with three vaccinations, we should see demand build back up, but it will take time for it to return to the heights of 2019.

Brighter days ahead for Japan’s hotel market?

It appears that we now are at the start of a defined recovery for Japan and there is clearly pent-up demand and strong interest in traveling to the country.  

Comparing searches made across the last year, there has been considerable growth. 

There has been an across-the-board increase in searches for Japanese destinations in flights when looking from a starting point of the week ending 12th September 2021. 

Over the year period, flight searches had increased by at least fourfold in all destinations in our dataset up to the 11th of September 2022. From this point, since the most recent announcement, flight search demand has skyrocketed with Osaka now at 27 times the original search volume and Kyoto up 26 fold. 

Flight search evolution index across Japanese cities

Japan Flight Search Evolution Index

There is also a return of business travel showing up in the data, with a huge growth in searches made on Global Distribution Systems (GDSs), albeit from a very low base. 

GDS search levels for Tokyo accommodation now stand 24 times higher than what they were in September 2021, which is a highly positive development for the city’s hospitality market and underlines that there has been a return of business travel to some degree. 

GDS hotel search evolution index for Tokyo

GDS Hotel Search Evolution Index Japan

Is 2023 the turning point for Japan’s hotel industry?

Where does this leave the Japanese hospitality market? And when will things return to some semblance of normality?

The good news is that there is an expectation of better times ahead, the bad news is that this remains some way out. 

Looking at our pricing data across this year and next for Japan’s current and former capitals of Tokyo and Kyoto, there is a consistent picture of gradual improvement, but for room rates to finally cross above 2019 levels, which would indicate an at least partial recovery, we will need to wait well into 2023.

Actualised and advertised pricing in 2022 & 2023 for Tokyo

Tokyo future pricing

Actualised and advertised pricing in 2022 & 2023 for Kyoto

Kyoto future pricing 2022 23

 As noted earlier, prices for Tokyo are on average around 40% down from where they were in 2019 and that difference largely continues in advertised prices for the remainder of 2022. 

Things are more positive in Kyoto, where advertised prices being put up by hotels are, on average, 28% down on their nominal level three years prior, but closing to 2019 levels as the year ends. 

Hotels are expecting demand to pick up significantly in 2023, with much improved prices being posted online than what we have been experiencing recently. 

In Kyoto, prospective rates are 63% higher across the data available for 2023 so far when compared to 2022 and in Tokyo the figure rises to an impressive 79% growth year-on-year when averaged out. 

The currently expected inflection point where prices can finally exceed where they were pre-pandemic lies in June 2023, which indicates that hoteliers are expecting a return to open travel next year and a strong summer period. 

What’s more the direction of pricing increases in both Tokyo and Kyoto follows a common trendline, which suggests that the recovery is broad-based and the leading indicators are positive across the Japanese market. 

Therefore, we can finally view the future of Japan’s travel and tourism market with some optimism. 

It is most likely to be a long road to build up to pre-pandemic international arrival levels, but we can at least say that after two long, difficult years, the momentum has finally swung back in favor of more, not less, travel to the land of the rising sun.    

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