The weakened yen and promotional packages fueled a surge in Southeast Asian visitors to Japan in May that offset the decline in Chinese tourists that has continued since a territorial spat erupted.

The number of visitors from Thailand soared 67.8 percent in May from the same month last year, while the increase was 39.3 percent for Indonesians and 24.5 percent for Singaporeans, according to a report released June 19 by the Japan National Tourism Organization.

Tourist numbers from Malaysia, the Philippines and Vietnam also rose by double digits, the report showed.

Overall, 875,400 tourists visited Japan in May, up 31.2 percent from the previous year. The number is a record for May and the third largest monthly total.

Tourists from South Korea and Taiwan--the largest and the second largest groups--were also higher than last year. Visitors from South Korea, Taiwan, China and Hong Kong still account for 65 percent of all foreign travelers to Japan.

However, the number of tourists from China has drastically fallen since the Japanese government bought three of the Senkaku Islands in the East China Sea from private ownership in September 2012. The acquisition triggered anti-Japan protests across China, which also claims sovereignty over the uninhabited isles.

With no end in sight to the dispute, the Japanese government plans to raise visitor numbers from Southeast Asia and lower its dependence on tourists from East Asian countries.

Specifically, it wants to attract 1 million Southeast Asian tourists this year, and 2 million in 2016. The number was 780,000 last year.

To achieve these goals, the Japan Tourism Agency plans to lower conditions for Southeast Asians to obtain tourist visas to the same level as those for South Koreans. The eased requirements will allow Thai and Malaysian tourists to enter Japan without visas by this summer.

Another thing working in the favor of Japanese tourism officials is the weakened yen.

Nazerah Mohamed, 44, a Singaporean elementary school teacher, and her husband joined a six-day, five-night tour to Hokkaido and Tokyo. They ended up at the Takeya discount store in Tokyo’s Taito Ward on June 19 to buy chocolates and other souvenirs.

“The mesh-grilled scallops we had near Lake Toyako were delicious,” Nazerah said.

An official of a Tokyo-based company involved in arrangements for the tour said, “Buoyed by the weakening yen, the demand for tours that cater to Southeast Asians has been rising since the end of last year.”

The influx of Southeast Asian tourists is also evident at department stores.

The increase in Thai shoppers in May was largely behind the highest monthly duty-free goods sales at the Takashimaya department store in Tokyo’s Shibuya Ward since 2008, store officials said.

Thippawan Yongsiriwit, 56, a Thai civil-service worker, bought three Issey Miyake brand bags at the store.

“Due to the weakening yen, they are about 30 percent less expensive in Japan,” said Thippawan, who added that Issei Miyake brand goods have gained in popularity in Thailand because they are the favorites of the Thai queen.

Japan’s tourism companies have also taken measures to increase visitor numbers from Southeast Asia.

In April, a record 12,500 foreign group tourists visited the Shinyokohama Raumen Museum in Yokohama, a facility featuring ramen noodle specialties from across Japan. Thai tourists accounted for 60 percent of the total.

Ayako Saiki, 15 June 2013

Abenomics is all the rage. Japan’s GDP grew at an annual rate of 3.5% in the first quarter, the stock market went up by almost 30% since December, and despite some uncertainties, sentiments, consumption, and exports are all picking up. However inflation is at -0.9% and survey-based inflation expectation has remained flat. Is inflation going to happen at all? This column argues the answer crucially hinges upon the implementation of structural reforms, especially in the labour market.

Abenomics is all the rage.

• Japan grew at 3.5% in the first quarter;
• The stock market is up; and
• Sentiments, consumption, and exports are all picking up – even if recent stock-market performance has created some uncertainties.

But negative inflation is still present.

• March 2013 CPI inflation was -0.9% (year on year), down from -0.6% in February.
• Survey-based inflation expectations are flat.

Although the market inflation expectation (break-even inflation rate) had increased from 1.3% in April to 1.9% in mid-May, it recently declined to 1.4% (as of June 6) (Figure 1).

Labour-market reform is the keyAccording to a survey by Reuters in February, 85% of responding firms said they would maintain current wage levels or make further cuts this year. Japanese companies typically resort to wage cuts for workers with so-called life-long employment contracts rather than lay-offs to adjust for cyclical downturns or due to tougher price competition from abroad. As a result, the unemployment rate has been low, but wages continue to decline. Due to the strong protection of permanent workers, firms typically have redundant permanent workers, thus have no incentive to increase their wages. 
Worse yet, only a third of the Japanese labour force (typically older and male labour) has a permanent contract. The majority of the young and female labour force is working under a temporary contract with much lower salary and practically no job security, which creates a kind of caste system in the labour market.

A permanent contract is especially hard to come-by for the younger generation and female workers. The youth unemployment rate in Japan is 8% (the total unemployment rate is 4.8%) as of 2011 according to the OECD, and the wage gap between male and female is the second worst among OECD economies.

Three pillarsAbenomics is comprised of three pillars:

• Aggressive monetary policy easing (Figure 2).
• Fiscal stimulus.
• Structural reforms.

Japan's benchmark Nikkei 225 trimmed its losses after plunging as much as 6 percent on Thursday in a vicious sell-off after the yen rallied over 1 percent against the greenback.

Uncertainty over central banks rolling back stimulus saw the dollar/yen drop below the key 95-handle, hitting a new 10-week low. The Nikkei index is now down 21 percent from last month's five-and-a-half-year high of 15,942, placing the benchmark index firmly back in bear market territory.

Elsewhere in Asia, Chinese markets experienced a bout of heavy selling with theShanghai Composite down over 3 percent after being closed since last week. Seoul shares fell over 1 percent fell to a new seven-week low and Australia's S&P ASX 200 hit a fresh five-and-a-half-month low.


Markets in emerging Asia also extended losses as capital flows continue to exit emerging market equities. Philippine's benchmark index slumped 4 percent and Indonesia's Jakarta Composite fell 2 percent

Central Bank Jitters

Nagging worries about the Federal Reserve tapering its bond-buying program and disappointment from the Bank of Japan's policy inaction at its Tuesday meeting have roiled global equity markets in recent sessions, leading the Dow Jones Industrial Average to drop for a third session in a row on Wednesday.

"We are seeing the first signs of a lack of confidence in the ability of central banks to control the interest rates, to stimulate inflation, and real GDP [gross domestic product] growth rates," said Viktor Shvets, head of strategy research, Asia, at Macquarie.

Prime Minister Shinzo Abe outlined on June 5 a sweeping blueprint for rejuvenating Japan's ailing economy with reforms meant to bring more women into the workforce, promote industrial innovation and coax cash-hoarding corporations into investing more.

The strategies Abe sketched out in a speech form the third and most important plank in his "Abenomics" platform, which so far has focused on what he calls the first "two arrows" in his arsenal: loosening monetary policy and boosting public spending. He has promised structural reforms to underpin growth in the long run as Japan's population ages and shrinks.

"Now is the time for Japan to be an engine for world economic recovery," Abe said. "Japanese business, what is being asked is that you speed up. Do not fear risk, be determined and use your capacity for action."

Without an overhaul of Japan's bureaucracy and its agricultural, industrial and labor policies, economists say Abenomics is bound to provide only a temporary boost to growth while vastly increasing the country's public debt burden. All agree that reforms are needed to break Japan free of the deflationary malaise that has stymied growth since its bubble economy collapsed more than 20 years ago and sustain growth in the future.

Investors appeared unimpressed: the benchmark Nikkei index, which had slipped 0.3 percent in the morning ahead of the speech, was down 1.1 percent just afterward. The Nikkei had gained over 70 percent since November on expectations that Abe's program would boost growth and corporate profits, but has lost nearly 20 percent in the past few weeks on growing uncertainty over how well the plans are working.

Abe pledged on June 5 to raise Japanese incomes by 3 percent a year to protect consumers' purchasing power if the government meets its target of boosting inflation to 2 percent within two years. However, his speech was short on details of how to achieve that aim after more than two decades of economic stagnation.

He also promised to raise Japan's per capita gross national income by more than 1.5 million yen ($14,970) in 10 years. It now is about $45,000 a year.

So far the government has taken only piecemeal initiatives such as loosening controls on online sales of over-the-counter drugs. Abe intends to raise private investment in roads and to set up "strategic economic zones" where private companies will be allowed to operate public facilities such as airports.

Abe has repeatedly stressed his desire to encourage more women to work by improving access to affordable child care and extending parental leave. He also has called for improved English language instruction and loosening of labor regulations that discourage job hopping. He did not discuss details of those plans in his speech.

Abe had promised to present his reform proposals by mid-June, a month ahead of an election for the upper house of parliament that his Liberal Democratic Party is determined to win--possibly assuring Abe another three years in office. But amid the recent volatility in financial markets and questions over his resolve to follow through with reforms, he has offered repeated previews of what he has in mind.

"The structural reforms are as important as the first two arrows," Sri Mulanyi Indrawati, a managing director of the World Bank, told a recent conference in Tokyo.

Abe has made reviving the economy his top priority since taking office nearly six months ago, so far with mixed results.

The economy grew at a 3.5 percent annual rate in the first quarter, while a weakening yen helped boost the repatriated profits of big Japanese corporations.

But despite rising costs for imported energy and food, overall prices have remained flat, and despite massive purchases of government bonds meant to pump cash into the economy, the central bank remains far from achieving its 2 percent target for inflation.

Though most economists have given Abe's initial efforts a thumbs-up, it is the longer-term reforms that will really count, they say.

"One thing is certain about growth policy: there is no silver bullet or panacea," said Masazumi Wakatabe of Waseda University. "In particular, contrary to the popular view, industrial policy has rarely worked in Japan or in other countries."

Defending Abenomics in a recent speech, economy minister Akira Amari said, "This time, strategy will be followed by action."

"Instead of lowering the bar, this will be a growth strategy that will continue to evolve," Amari said. "The goal is to equip Japanese industry with the strengths it needs to compete."

Many of the reform proposals aired so far, however, are incremental, technical changes, such as providing insurance for factories leasing equipment.

Though Japan's plan to join the "Trans-Pacific Partnership," an Asian-Pacific regional trade pact, could provide some foreign pressure to modernize and open up protected farming and other areas, most changes would come years later, says Junji Nakagawa, an expert on the TPP at Tokyo University.

Land and tax reforms to facilitate consolidation of small farms would help, but have proven politically daunting, and the pact will not have any immediate impact even on imports of rice, which are now subject to a nearly 800-percent tariff.

"Maybe seven or five years from now, Japanese farmers may face real competition," Nakagawa said.