【MACRO Alert】The Dual Engines of Japan's Economy: Booming Tourism Industry and Subtle Adjustments in Central Bank Policies

As July approaches quietly, Japan's economy is propelled by dual forces: the unprecedented boom in tourism and the subtle adjustments in central bank policies, together painting a complex picture of Japan's economic landscape.

Since the first half of 2024, the continuous depreciation of the yen has injected strong momentum into Japan's tourism industry. Data from the Japan National Tourism Organization (JNTO) shows that tourist arrivals in May exceeded 3.0429 million for the third consecutive month, surpassing the 3 million mark. Behind this figure lies the record low exchange rates of the yen against the US dollar and the euro, making Japan a more economically attractive destination for international tourists.

The influx of international tourists has not only boosted tourism revenue but also had profound implications for Japan's economy. According to the United Nations World Tourism Organization's “Tourism Barometer,” international tourists contributed $38.6 billion in revenue to Japan in 2023, ranking it as the tenth highest globally in tourism income. Their spending has held a significant position in Japan's Gross Domestic Product (GDP); in the fourth quarter of 2019, their consumption amounted to approximately ¥46 trillion on an annualized basis, second only to automotive exports. By the first quarter of 2024, this figure soared to ¥72 trillion, further solidifying their crucial role in Japan's economy.

The prosperity in the tourism industry has also driven the development of related sectors. Data from the Japan National Tax Agency shows that in Hakuba, renowned for skiing and hiking, land prices surged by as much as 32.1% over the past year, marking the largest increase on record. Additionally, according to the Japan Department Stores Association, tax-free sales in 2023 reached ¥348.4 billion, setting a new historical high.

Amidst this economic boom, the Bank of Japan (BOJ) is also undergoing significant policy adjustments. This week, the BOJ is engaging directly with market participants in a crucial meeting aimed at determining a practical pace for announcing plans to reduce its bond-buying program later this month. The BOJ's Financial Markets Department is meeting with banks, securities firms, and others to gather market feedback and assess how to swiftly decrease its presence in the bond market before the plan's announcement on July 31.

For years, the BOJ has been regarded as a “whale” in Japan's government bond market, having accumulated over half of Japan's outstanding government debt through more than a decade of quantitative easing policies. At last month's policy meeting, the BOJ decided to slow down its bond purchases. Governor Haruhiko Kuroda emphasized the need for cautious planning and stressed the importance of soliciting market participants' opinions before reaching a final decision.

According to a survey by Bloomberg, market observers predict that the Bank of Japan (BOJ) will initially reduce its monthly bond purchases from the current ¥60 trillion to around ¥50 trillion (approximately $310 billion), with expectations for this pace to slow further to ¥30 trillion two years later. While some analysts believe a larger-than-consensus reduction could help alleviate pressure on the yen, former BOJ Executive Director Masahisa Muroya stated that the scenario of reducing bond purchases to zero “absolutely won't happen.”

The boom in the tourism industry and the adjustments in central bank policy intertwine to shape a complex economic landscape in Japan. The growth in tourism not only drives local economic development but also provides the BOJ with additional policy leeway. While the BOJ's policy adjustments aim to stabilize financial markets, they must also consider the economic vitality brought by the tourism sector.

Against the backdrop of a constantly evolving global economic situation, the BOJ's policy adjustments and the prosperity in the tourism industry together mold the country's economic outlook. With the BOJ's bond holdings totaling ¥585 trillion, surpassing the size of the world's fourth-largest economy, bond investors must remain highly vigilant of the BOJ's next moves. Simultaneously, the sustained growth in tourism offers new growth opportunities for Japan's economy, injecting fresh vitality into its future development.