The record-breaking increase in inbound tourists in 2015 brought both economic benefits and hospitality challenges for the lodging industry in Japan. While hotels in city areas enjoyed historically high occupancy rates and significant sales increases by strategically increasing room rates, traditional Ryokans in surrounding areas struggled to attract the inbound travellers. Moreover, the massive influx of inbound travellers and room shortages in major cities led to a boom in short-term rental in Japan in 2015, which the traditional lodging industry is struggling to regulate and deal with. On 20 June 2016, a Japanese government committee composed of the Japan Tourism Agency and the Ministry of Health, Labour and Welfare released its final report on “Minpaku”, which is the Japanese term for “private rental”. Following the report findings, Euromonitor International assesses the direction of lodging industry growth in Japan.
Strong growth in inbound arrivals
The Japanese government has made increasing inbound tourists a major goal in the build-up to Japan hosting the Olympic games in 2020. In 2015, Japan welcomed over 19 million inbound tourists, a 47% increase on the previous year, with this greatly contributing to a lodging upsurge, especially in city areas such as Tokyo, Osaka and Kyoto. In view of the strong demand, many hotels in city areas increased pricing to maximise revenue, resulting in the overall lodging industry registering an aggressive 12% current value growth in 2015. Hotels in city areas even recorded remarkable monthly occupancy rates of nearly 90% in peak periods.
Short-term rentals to benefit from full hotels?
The rapidly growing inbound tourist numbers not only benefitted the existing businesses, but also introduced a new lodging option in Japan: “Minpaku”, or private rentals. The capacity shortage in major cities boosted this new entrant. However, whilst short-term rentals witnessed a historic year, with 123% current value growth over the previous year, it still accounted for less than 2% of the entire lodging sales in 2015. In addition to the fact that domestic travellers accounted for over 80% of entire lodging market, Minpaku is technically illegal in most places in Japan under the current legislative framework. The complexity and anachronisms of the regulations are cause for confusion in the industry, and while this is not the place to discuss the intricacies of Japan’s 70-year-old laws, it is interesting to look at the implications of the recent 20 June ruling by the JTA and MHLW committee on Minpaku.
There has been a long-term discussion about whether or not to deregulate Minpaku in order to create more capacity to accommodate the increasing inbound demand. The committee expressed its view that a Minpaku service meeting certain conditions should be regulated under a new legislative framework, which is scheduled to be introduced as a bill in the next Diet session in autumn 2016, at the earliest. However, questions remain whether the new legislative framework can boost the Minpaku business, and whether Minpaku accommodation can provide a real solution to easing the overflowing lodging industry. The answer at present is likely “no”, because the new legislation proposed by the committee did not contain enough deregulation, still requiring individual hosts to notify the government, as well as limiting the days of operation. It is still too complicated, meaning that it is unlikely that potential hosts will appear en masse thanks to the new legislative framework.
Therefore, as short-term rentals players like Airbnb remain in legal limbo for now, growing tourism numbers provide an opportunity for the improvement of existing facilities which have not yet enjoyed the benefits of the traveller influx, but can help alleviate overcapacity in city hotels.
The potential of Ryokan
While hotels in cities and short-term rental attracted a lot of attention, hotels outside major cities and traditional Japanese-style lodging, Ryokans, struggled to attract the inbound travellers. In addition to the low awareness of the traditional lodging style in Japan amongst foreign travellers, language barriers, limited accessibility, old and non-westernised facilities and delays in digitalisation are often blamed for difficulties in attracting foreign tourists. Nonetheless, other lodging, represented by Ryokans, has a capacity of over 700,000 rooms, which is nearly half of the entire lodging capacity in Japan. In addition, towards the end of 2015, inbound travellers, especially those who repeatedly visit Japan, started to seek more “local experiences”, for which Ryokans can offer the best solution. This leads to a clear opportunity that all stakeholders in Japan should be working to help improve.
Collective and decentralised approach needed to support future growth
So what is required to optimise the supply-demand balance across the nation and attract the overflowing inbound traveller numbers to Ryokans and hotels in the countryside? The first key focus is a collective approach in appealing to the Ryokan culture among foreign travellers. While Ryokans are widely loved by Japanese consumers, these players are mostly operated by independent businesses and have limited resources for any investment. To support the fragmented players and deliver sustainable development of the industry, a collective approach by larger organisations, such as government, trade associations and travel agencies, is essential. In June 2016, the Japan Ryokan & Hotel Association entered an affiliation with PayPal to offer a more convenient experience for foreign customers. The Japan Travel Agency has also expressed its intent through government budgets to support renovations and reinforcement of facilities at independent Ryokans. Ryokans are expected to use these moves as an opportunity to improve their offer before the upcoming Olympics and fully exploit this support.
The second key focus is decentralisation, not only within the lodging industry, but also within the entire travel industry. Whilst major cities such as Tokyo, Osaka and Kyoto were being overwhelmed with inbound travellers, there were many other cities that still had enough rooms and were quite accessible due to Japan’s excellent transportation system and their relative proximity to the major cities. The centralisation trend in inbound tourists is due to the popularity of packaged tours (GIT) from China that visit Tokyo and Osaka. The great popularity of packaged tours is, however, an opportunity for decentralisation as the tour itineraries are controllable by tour operators to some extent. On the major tours, passengers are transported by limousine busses and, depending on the travel purposes, staying in major cities is not mandatory. In addition, there is a movement in the aviation industry to privatise regional airports and encourage the attraction of low-cost carriers with lower landing fees. The increase in inbound tourists is creating many benefits for the country and helping to achieve its goal of becoming a leading destination for tourists. However, with short-term rental options currently unclear, Japan can continue to delight tourists with its traditional accommodation, while relieving the strain on its lodging infrastructure if its leaders and stakeholders can work together to produce such a solution.