WP/20/169 Japan’s Inbound Tourism Boom: Lessons for its P ost-COVID-19 Revival by Anh Thi Ngoc Nguyen IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 202 0 In ternatio na l Mon eta ry Fund WP/20/169 IMF Working Paper Asia Pacific Department Japan’s Inbound Tourism Boom: Lessons for its Post-COVID-19 Revival Prepared by Anh Thi Ngoc Nguyen1 Authorized for distribution by Paul Cashin August 2020 Abstract In this paper, we review developments in Japanese inbound tourism and investigate the main determinants of its rapid growth prior to the COVID-19 pandemic. Using a panel autoregressive distributed lag (ARDL) model with data on 34 tourism source markets from 1996Q1 to 2018Q4, we find that not only tourist income and tourism-related relative prices, also visa policies have had signif icant impacts on Japan’s inbound tourism demand in the long run. In the short run, natural disasters have had large and prolonged effects on tourism. We then derive policy implications f or the post-COVID-19 revival of Japanese inbound tourism. JEL Classif ication Numbers: L83, N75, O53 Keywords: Japan inbound tourism, tourism determinants, Abenomics, visa policy, COVID-19, panel ARDL Author’s E-Mail Address: anguyen4@imf.org 1 The author is an Economist in the IMF Regional Office for Asia and the Pacific (OAP) in Tokyo. The paper wa s written with im p o rtan t co ntrib utio ns a nd su p port f rom Siegf ried Stein lein a nd Tak uya Kamoshid a (b oth OAP). The author is also grateful for very helpful comments from Pa ul Cashin, Gee Hee Hong, Mariana Co la celli, Ta k uma H isanaga, a nd in f o rmativ e d iscussio ns with o f ficers f ro m Japan Tou rism Agen cy a nd Ja pan Na t io n al To urism Orga nizat io n d u ring t h e 2 0 19 Ja pan Art icle I V m issio n . Ex cellen t research a ssistance wa s provided by Qianmao Zhu and Yaming Chang during their summer internships at the OAP. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 Contents Abstract ______________________________________________________________ 1 I. Introduction__________________________________________________________ 3 II. Inbound Tourism Developments in Japan ___________________________________ 4 III. Literature Review ____________________________________________________ 9 A. Tourism Demand and its Determinants __________________________________ 9 B. Japan’s Inbound Tourism and its Determinants ___________________________ 11 IV. Data and Methodology _______________________________________________ 12 A. Model _________________________________________________________ 12 B. Data/Expected Signs _______________________________________________ 14 V. Results____________________________________________________________ 16 A. Heterogeneity in Long-run Behavior of Japan Tourists from Different Countries __ 16 B. Long-run Tourism Determinants ______________________________________ 16 C. Short-run Tourism Determinants ______________________________________ 18 VI. Conclusions and Policies ______________________________________________ 18 References ___________________________________________________________ 23 Boxes 1. The COVID-19 Shock and Japan’s Inbound Tourism ___________________________ 9 Figures 1. Total International Arrivals ______________________________________________ 5 2. Development of Inbound Tourism at the Regional Level ________________________ 6 3. Contribution of Inbound Tourism to the Japanese Economy ______________________ 7 4. Government Efforts to Boost Tourist Numbers________________________________ 8 Tables 1. Long-run Results of ARDL Panels f or Tourist Arrivals (1996–2018) ______________ 21 2. Determinants of Japan’s Tourist Arrivals in the Short run (1996–2018) ____________ 22 3 I. INTRODUCTION Before the early-2020 COVID-19 bust in tourist arrival numbers set in, Japan’s tourism industry had witnessed a boom in the number of international tourists over the previous decade (International Monetary Fund 2020a, 2020b). The number of arrivals almost tripled from 2013 to 2018 to a record 31 million. The average growth rate of tourist arrivals during the 2013–2018 period was 25.1 percent annually. The share of international tourists in Japan’s total domestic tourism expenditure increased from 4.7 percent in 2009 to 17.3 percent in 2018, marking their increasing importance for the tourism industry in Japan. However, the number of international visitors has collapsed since the beginning of 2020 due to the