This article about Japanese travel and tourism stocks is written by Katsunori Ogawa, portfolio manager of the Sakigake High Alpha fund at Asia asset manager SuMi TRUST. Those who wish to respond with comments can email tom.burroughes@wealthbriefing.com. Comments of guest contributors are not necessarily endorsed in full by the editorial team.

The big story around tourism and travel companies in Asia is Japan, and also China reopening its economy after its zero-Covid policy. This reopening has taken place much later than it did in the US and Europe. As such, tourism and travel in Asia have very strong tailwinds behind them due to pent up demand which can be released after years of restrictions.

So, whilst the global economy is flagging, travel and tourism stocks in Japan are likely to yield good returns over the medium term.

High inflation, central bank rate hikes, geopolitical friction and banking crises are all contributing to a global economy in turmoil. In the G7, growth is stagnating and good investment opportunities are thin on the ground.  

Tourism stocks in Japan are currently untouched by this malaise. On the contrary, Japan’s tourism industry is gaining momentum. Following borders reopening post-Covid in October 2022, tourism levels have surged to 1.8 million visitors in March 2023, or about 66 per cent of pre-Covid figures. Whilst there is some way to go to hit 2019 levels, the rapid month-on-month increase is reassuring, and the peak season is just beginning. 

The full effect of China’s reopening is also yet to be felt amongst Japanese leisure stocks. Before the pandemic, Chinese tourists accounted for a third of the 31.88 million visitors to Japan. China removed all restrictions on foreign travel in January of this year, a seismic shift that will lead to a resumption of the hugely important Sino-Japanese tourism trade. 

However, the value of the domestic travel market should not be underestimated. As is to be expected, domestic travel has recovered faster than international travel, with levels already at 70 to 80 per cent of pre-pandemic levels. In particular, the Baby Boomer generation will drive this continued recovery. This generation has ample disposable income and is expected to turn to domestic tourism as international travel becomes too taxing. Public transport and hotels that operate in major urban areas are likely to benefit from an increase in business travel.

As these tourists return in droves, many stocks in the leisure and hospitality industries have already witnessed a significant resurgence. This will accelerate over the summer months, providing a much needed influx of foreign capital.

The hotel industry looks promising in the medium term. Nightly rates have historically been far cheaper than in other similar economies so there is significant scope for price increases. Retailers that generate a significant portion of their revenue from sales to overseas tourists stand to gain too, particularly as the yen remains weak.

As the yen remains weak, retailers that generate a significant portion of their revenue from sales to overseas tourists stand to gain too.

Two stocks particularly well positioned to take advantage of the ongoing tourism boom are Central Japan Railway and Oriental Land. 

Central Japan Railway (9022) operates Japan’s high speed rail network. Their flagship route is the 340-mile line that connects Osaka to Tokyo, though the business also has operations in hotels, merchandising and real estate. As the number of rail users rises, the Tokyo-Kyoto bullet train, always popular amongst tourists, stands to gain. Increased revenue will be complimented by improved operating efficiency following the pandemic; the business has reduced staffing costs through digitisation and optimised its repair and inspection procedures. The company’s hotel business is also positioned to benefit from an increase in tourism numbers. As such, Central Japan Railway looks well positioned to continue its strong recovery.

Oriental Land (4461) is the company behind a number of Japanese theme parks, including Tokyo Disneyland. The business invests heavily in developing new attractions, keeping visitor numbers on an upwards trajectory, in spite of recent price rises. 

Oriental Land has successfully identified the critical price point at which custom begins to fall and sets the price accordingly. For obvious reasons, this stock struggled during the pandemic. However, as domestic tourism numbers increase sharply, the company stands to gain. Combined with the auspiciously timed celebrations for the park’s 40th anniversary, Oriental Land can expect to see revenue increase over the coming months. In the post-Covid-19 holiday rush, investors could do worse than to look again at hotels, trains and theme parks.