Tourists take photos of early blooming Sakura trees in front of a convenience store in Tokyo. Early blooming Sakura trees in Tokyo, particularly varieties like Kawazu-zakura, typically start flowering in late February to early March, ahead of the more common Somei Yoshino cherry blossoms that peak in late March to early April. The phenomenon is tied to milder winters and specific cultivars, offering a vibrant pink spectacle against Tokyo’s urban backdrop before the main cherry blossom season kicks off.
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Foreign tourists have had a disproportionately large impact on Japan’s economic growth in recent years. However, their influence could start to wane as the yen strengthens, analysts said.
Tourists have been a key driver of the resurgence of the Japanese economy. Many have been attracted by weakness in the yen, which has made shopping, entertainment, transport and overnight stays cheaper.
What happens if the tide turns and the yen strengthens?
Travel spending in Japan has soared in recent years. Indeed, inbound tourism contributed half of Japan’s full-year GDP growth rate of 1.5% in 2023, and 0.4 percentage points to Japan’s 0.1% annual GDP growth last year, according to the Mastercard Economics Institute.
It marks a dramatic change in the make-up of the world’s fourth-largest economy. Tourism contributed an average of 0.1 percentage point to GDP from 2010 to 2019, at a time when Japan’s GDP growth rate was averaging 1.2%.
MEI’s report showed that a weaker yen had made Japan a more appealing shopping destination. This is in stark contrast to other countries around the world, Mastercard’s chief economist for Asia Pacific David Mann said, where tourists prefer to spend on experiences, such as going to a restaurant, concert or bar.
Japan has been one of Asia’s hottest travel destinations of late. So much so that, according to Japan’s tourism organization, the country saw a record 36.9 million visitor arrivals for the whole of 2024.
Not only that, but tourists also spent more, with preliminary figures showing that annual spending by international visitors to Japan in 2024 reached a record high of 8.1 trillion yen ($54.06 billion), a massive 53.4% rise compared to a year ago.
Average individual spending among overseas travelers to Japan rose by 6.8% to 227,000 yen. However, some of the clement conditions that enabled this higher tourism interest could be about to reverse.
Higher domestic inflation has prompted the Bank of Japan to raise interest rates, in contrast to other major central banks that are lowering rates. That, in turn, has triggered the yen to strengthen to a five-month high against the U.S. dollar on March 11.
Japan’s booming tourism industry
Yujiro Goto, head of FX strategy for Japan at Nomura, told CNBC that weaker inbound tourism would be a negative for Japan’s GDP growth.
This is because yen weakness has been one of the key reasons for the acceleration of inbound tourism. A substantial appreciation in the currency is then expected to reverse this trend.
The yen was last seen trading at 148.26 against the greenback, strengthening about 7.2% compared to its 2025 high of 158.87.
A small appreciation in the yen, which has been at historic lows, “like from 161 to 146 so far against the USD may not change the trend, in my view,” Goto said.
Min Joo Kang, senior economist for Japan and South Korea at Dutch bank ING, shares this view, but also pointed out that inbound tourism may still have room to grow, given that the number of Chinese tourists has not yet recovered to pre-Covid levels.
“The measures announced over the weekend to boost consumption also include supporting higher wage growth and stimulating Chinese asset markets. This may trigger an increase in Chinese outbound tourism,” she added.
Beijing on Sunday rolled out a plan to boost consumption, calling for measures to raise wages, as well as “multiple measures” to stabilize the stock market, among others.
Weaker tourism growth does not necessarily mean Japan’s GDP expansion will fall off a cliff. Mastercard’s Mann said that the contribution from domestic consumption in Japan is expected to improve, given the strong labor market and the increase in wages.
This photo taken on February 20, 2025 shows the 634m-high (2,080 ft.) Tokyo Skytree (L) from a train line in the Oshiage area of the Japanese capital.
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Japan’s largest labor union announced last Friday that it managed to secure an average 5.46% increase in wages from April, its largest increase in 34 years.
“So tourism may ease off, but then domestic consumption may take over as being a driver of growth,” Mann said.
Should there be an appreciation of the Japanese yen, ING’s Kang said it would have a more positive impact on the domestic economy, boosting private consumption and services.
Tourism management
Goto also said that gradual strength in the yen could slow cost-push inflation and would improve real wages among domestic residents. This would help shift the GDP contribution from foreign spending to domestic spending.
What’s more, Goto said that while overtourism has become a major problem in regions like Kyoto, foreign demand is clearly supportive for wages and the inflation positive feedback loop that the BOJ wants to achieve.
He also pointed out that “regional governments may consider higher taxes for foreign visitors (hotels, airports, etc), which can support the Japanese fiscal situation while managing the tourism flows.”
Mann concluded by saying that tourism has been a far bigger contributor than anyone would have expected over the past two years, and “will remain a significant contributor to Japan’s economy before it eases off further and be replaced by slightly stronger contributions from domestic consumer spending.”
“The yen weakness probably will be starting to reverse at least this year, but it will be a longer term process, rather than turn around in just one or two months.” Mann added.