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2016.08.19

A Winning Hit for Abenomics ―Scheme to Build Aviation Infrastructure― Making Japan-China-South Korea Flight Network as Convenient as Domestic Flight Network to Bring Huge Economic Benefits

An article published in JBpress on July 21, 2016

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States

Growth of China's middle class is the main source of rapid increase in inbound visitors


Since the beginning of this year, there has been concern that the so-called bakugai explosive buying by foreign travelers, mainly by Chinese visitors, is losing momentum. Nevertheless, the wave of inbound travelers has not necessarily abated.

The bakugai explosive buying of last year was abnormal, driven by various factors, including rapid growth of foreign travelers mainly from China, the weaker yen, and bulk buying by China-related smugglers.

According to the Japan National Tourism Organization (JNTO) statistics, the estimated number of visitors to Japan for the January-May period of this year reached 9.72 million, an increase of 29% over last year, still showing a continued upward trend.

The top three countries or regions from which inbound visitors come are China, the top with 2.49 million, up 45% from the previous year; South Korea, the second with 2.04 million, up 30%; and Taiwan, the third with 1.76 million, up 22%. It is clear that the short distance between Japan and these countries making it relatively easy to visit is one of the reasons why travelers from these countries or regions have chosen Japan.

Now, many of the visitors to Japan, being repeaters, seem to have ended the bakugai explosive buying sprees they engaged in on their first visits. The main purpose of the repeat visitors traveling Japan is no longer consumption of goods but consumption of experiences.

Chinese tourists, who are the major players in the consumption of experiences out of inbound visitors, are extremely important business targets for Japanese companies across the country from Okinawa to Hokkaido. Their mother group is the rapidly expanding middle class within China. This emerging middle class is the most important base of customers for Japanese companies.

Since the beginning of this year, Japanese cars are selling well in China, and many Japanese companies are finding it easier to do business this year than last year, owing to the positive attitudes of Chinese local governments and companies to attract and make alliances with Japanese companies.

The background to the change is the increasing trend in potential demand for Japanese products and services as the middle class expands.

According to the latest announcement, China's GDP growth rate for the second quarter was 6.7%, losing momentum of the double-digit growth of the past. China's GDP growth rate will show a gradual declining trend in the medium to long run.

However, the urban population of the middle class, which is to become the base of customers for Japanese companies, is projected to reach 800 to 900 million by 2020 from the current 400 to 500 million, and it is estimated that the double-digit growth will continue in the future. This growing middle class is the main source of the rapid increase in inbound visitors.

According to the current balance of payments and fiscal and price stability of China's economy, it is almost certain that the middle class will continue growing until 2020.

Therefore, it should be considered that the momentum of increasing inbound visitors from China will not deteriorate until 2020. Japanese companies can expect significant growth in demand that will provide one of the few business opportunities in Japan.



UK leaves EU, US economy is at a standstill


Taking a look at the world economy, conditions may make it difficult to consider aggressive investment expansion at the moment with a rising sense of uncertainty in the European economy caused by the withdrawal of the United Kingdom (UK) from the European Union (EU).

The United States' (US) economy is easily affected by the European economy. As the Barak Obama administration recently cut this year's economic growth forecast downward 0.7 point to 1.9%, recovery of the US economy is at a standstill, making it increasingly difficult for the Federal Reserve Board (FRB) to raise interest rates.

Only the stock markets are lively, but the investment environment cannot be said to be attractive to Japanese companies.

When one looks around the world, the only destination suitable for investment seems to be China by elimination. Needless to say, conditions in China will remain severe also in the future in areas related to the heavy and chemical industries, which are pressing ahead with reduction of overcapacity.

In contrast, the services sector still maintains strong growth as the engine of the Chinese economy. While massive layoffs are made by the heavy and chemical industries, the people laid off are absorbed one after another by e-commerce, recreation, medical and nursing care, logistics, etc. in the services sector. And thus, the balance of labor supply and demand remains steady.

The challenge of marketing is how to grasp the demand on the bright side, not the dark side, of the patchy Chinese economy. Companies that can succeed in business in China are those that can timely grasp the demand by producing products that meet the needs of customers through improvement of products within a short time under the close cooperation among each department in charge of sales, research and development, and manufacturing.



Construction of aviation infrastructure to be the next move for Abenomics


In July, the Liberal Democratic Party and Komeito ruling bloc swept to victory in the Upper House election. The public's approval of the ruling bloc lies in expectations for economic policies. If the campaign had been made calling for constitutional revision and strengthening of defense power, the ruling bloc would probably have not earned such a high approval rating.

Nonetheless, Abenomics recently has not had the momentum it once had.

Originally, Abenomics had garnered great public expectations of its third arrow of structural reform, but none of policies of the third arrows have been successful in restoring Japan's economy. What the public expects of the Abe Administration is to plan and implement the next move.

Prime Minister Shinzo Abe is reported to have given instructions to start putting together new economic measures to end deflation and recover the economy, by the end of July. With that, I would like to propose a measure that will gain the attention of companies not only in Japan but throughout the world. It is the concept of building aviation infrastructure to integrate East Asia.

During the high-growth period, investments that had the greatest economic impact on the Japanese economy were the Tokaido Shinkansen and Tomei Expressway. Today, as globalization, especially integration of the East Asian economic bloc, proceeds, what corresponds to the former Shinkansen is the aviation network.

If traveling within the East Asian region is made as convenient as domestic traveling by significantly reducing air traveling times, it will bring about a huge induced economic impact. The major benefit of the EU as an economic community was the high convenience of travel within the region.

The extent of the economic impact of bringing the same to East Asia is clear. The merits would have been few only a few years ago when the economic gaps between the three countries of Japan, China and South Korea were wide. However, today when inbound travelers support the Japanese economy, its induced economic impact is immeasurable.



Concrete measures to reduce air traveling times


Reducing air traveling time within the East Asian region does not mean beginning services of supersonic jetliners. It is to greatly reduce traveling time by improving infrastructure around airports based on current airline networks. This includes the following measures:

(1) Completion of airport security checks and passport controls within ten minutes

It is possible to arrive at the airport thirty minutes before a domestic flight departure. In contrast, it is common to usually arrive at the airport two hours before an international flight departure.

The main reason for this difference of one and a half hours is the time spent on security checks and passport control for international flights. When traveling to Europe and the United States, for which the flights alone take more than ten hours, the one-and-a-half hour difference from domestic flights is not of much concern.

But, in traveling within the East Asian region of Japan, China, South Korea and Taiwan, this one-and-a-half hour difference is indeed inefficient for flights of two to four hours.

Therefore, security checks and passport controls for flights only to the East Asian region should be sped up by separating the region from other destinations and increasing the number of counters, so that both procedures may be completed within ten minutes. Japan should be able to achieve it with its remarkable service capabilities.

(2) Ten minutes to Haneda and twenty minutes to Narita from Tokyo Station

Major terminal stations of Tokyo, Nagoya, Osaka and Fukuoka will be directly connected with the nearest international airports (Haneda, Narita, Chubu, Kansai and Fukuoka airports) via exclusive airport express subways, reducing traveling time to ten to twenty minutes.

Additionally, the express subways will be operated at increased frequency of every ten minutes or less, shortening waiting time and significantly improving convenience.

(3) Shuttle flights connecting major airports, from Haneda and Narita to Shanghai, Beijing, Gimpo, Incheon, etc.

For flights between major airports, changing flights will be made available freely without reservations if there are vacant seats. This will reduce the risk of flight delays, leading to increased business merits.

(4) Elimination of bottlenecks in receiving foreign travelers

With the rapid increase of foreign travelers, shortages in hotels, sightseeing buses, bus drivers, interpreter-guides, etc. has been the issue in question since last year.

If such conditions continue, the service level of traveling in Japan will decrease and the attractiveness of traveling will be halved. It is essential to eradicate these bottlenecks urgently in order to maintain the current increasing trend of inbound visitors.

(5) Strengthening of police capacity for public order to maintain security

With the rapid increase of foreign travelers, trouble and crimes caused by foreign nationals are increasing. In order to cope with such problems immediately and appropriately, it is necessary to also strengthen the capacity of police.

(6) Realization of a corporate tax rate of 25%

After achieving significant time savings in traveling within the East Asian region through these concrete measures, if another important condition could be added, the induced economic impact would be dramatically enhanced.

That is to cut the corporate tax rate to 25%, the same level as that of China and South Korea.

No matter how convenient traveling within the East Asian region may become, business managers would hesitate to invest in Japan, if the situation is that they would have to pay higher taxes when they move their business base to Japan. Eliminating the tax barrier is an extremely important measure as a finishing touch to the above series of concrete measures.



Expected results


Through achievement of the above concrete measures, traveling time within the East Asian economic bloc will be shortened greatly, economic efficiency of the three countries of Japan, China and South Korea improved significantly, and economic integration enhanced.

The leading power of the global economy is Asia's economies, centered on the three countries of Japan, China and South Korea. Revitalization of these three countries' economies will certainly contribute to global economy.

At the same time, the major cities in Japan may be expected to serve also as transportation hubs to East Asia, as traveling to Japan is made remarkably convenient for foreign tourists and business visitors, enabling them to easily stop by in Japan.

If this is realized, it is clear that there would be great incentives for companies around the world conducting business in Asia to establish bases in the major cities of Tokyo, Osaka, Nagoya, Fukuoka, etc. that provide a favorable environment, high-level services, and living convenience.

Increases in travelers and business visitors lead to higher demand for hotels, restaurants, retail and services. Accordingly, investment will expand into the major cities of Japan, produce a ripple effect on the surrounding smaller cities, and contribute to regional regeneration.

If the local regions strive to improve their services to welcome foreign travelers and compete with one another by practicing unique ideas, they will also be revitalized.

Especially, considering that most of the people visiting Japan are from China and South Korea, the expansion of direct private-sector exchanges between the three countries of Japan, China and South Korea is expected to also lead to the strengthening of mutual understanding. If this is realized before the Tokyo Olympic Games, its impact would be immeasurable.

I look forward to the adoption of the above measures as the next move of Abenomics.



(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on July 21, 2016.)

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