Abe’s Weak Yen Policy Erodes Japan Tourist Spending in Korea

Prime Minister Shinzo Abe’s push to weaken the yen is echoing through the duty-free shops and tourist sites of Korea where Japanese visitors spent about $4.5 billion last year.

Japanese visits to Korea have fallen five straight months to the lowest in two years in January, according to the Korea Tourism Organization. Korean Air Lines Co. passenger traffic between the two countries fell 9 percent last quarter from a year earlier, the biggest drop since the second quarter of 2011, when Japan was struck by its most powerful recorded earthquake.

The 13 percent decline in the yen against the won since the start of December prompted Japanese tourists, who account for the biggest portion of foreigners traveling to Korea, to cut spending. To weather the downturn, Korean companies that relied on Japanese visitors are offering charter flights and prizes to lure Chinese who more than doubled their spending in January and February from a year earlier at Lotte Duty Free.

“The Korean duty-free shops were dominated by Japanese travelers,” said Erwan Rambourg, a Hong Kong-based consumer analyst at HSBC Holdings Plc. “Now they are dominated by the Chinese. Japanese tourists are staying more at home.”

Abe, who became prime minister in December, has pledged to use monetary easing and fiscal stimulus to lift Japan out of more than a decade of price falls. He has pushed the central bank to be more aggressive in combating deflation in the world’s third-largest economy. The weaker yen has also helped undermine the competitiveness of Korean exports.

Duty Free

The Japanese currency is forecast to weaken to 102 yen to the U.S. dollar in 2015 from an estimated 94 in the second quarter of this year, according to the median of economist estimates compiled by Bloomberg. Japanese tourists in Korea cut their spending by about a fifth in the first two months of this year at Lotte Duty Free, the country’s biggest.

The number of Japanese tourists in Korea dropped 22 percent to 683,182 between November and January from the same period a year earlier, according to the Korea Tourism Organization. About 3.52 million Japanese visited Korea last year where the average visitor spent $1,273, generating approximately $4.5 billion in revenue, based on information from the Korea Tourism Organization and Korea Culture and Tourism Institute.

“There used to be many more Japanese tourists coming here to shop but that’s dropped recently, not just in numbers but also on how much they spend,” said Kim Su Yeon, a saleswoman at Lotte Duty Free in Seoul. “We’re seeing a lot more Chinese.”

Luxury Hotels

Hotel Shilla Co., which also has duty free shops, dropped 0.8 percent, the most since Feb. 26, to 52,200 won at the close in Seoul. Korean Air fell 0.5 percent to 42,250 won.

While a rise in Chinese visitors may help offset the drop in Japanese tourists the two groups spend disproportionately on luxury items and accommodation. Japanese prefer high-end hotels while Chinese splurge more on selective retail, said Lee Sung Tae, chief researcher at the Korea Culture and Tourism Institute.

“The currency swing will continuously negatively affect the hotel industry” in Korea, said Han Seung Ho, an analyst at Shinyoung Securities Co. in Seoul.

Lotte Duty Free has increased prizes for Chinese tourists who make purchases at the retailer with awards that include Hyundai Motor Co.’s Sonata sedan and Santa Fe sport-utility vehicle. It’s also added China offices to attract tourists on chartered flights to South Korea.

Overtaking Japanese

“Chinese tourists are more than helping to offset the decline in Japanese,” said Khang Shin Woo, an analyst at HMC Securities Co. in Seoul. “At this pace, Chinese visitors may overtake Japanese to become the biggest group of foreigners coming to South Korea this year.”

About 63,000 tourists from China visited South Korea during the week-long Lunar New Year in February, 25 percent more than a year ago, according to an estimate from the Korea Tourism Organization.

Japan’s economy returned to growth in the fourth quarter after two quarters of contraction. The economy will grow 2 percent the first three months of this year, a median estimate in a Bloomberg survey of economists showed.

Japanese visits to Korea may start recovering as early as next quarter as low-fare airlines add more flights between the two countries to stimulate demand, said Park Eun Kyung, an analyst at Samsung Securities Co. in Seoul.

Budget Airlines

AirAsia Japan Co. and Peach Aviation Ltd. started flying to South Korea last year. Peach tripled its service between Seoul and Osaka to three flights a day in June 2012, a week earlier than it had planned. It will begin trips between Osaka and Busan, Korea, in September.

“That shows you the pent up demand that existed on the route,” Luke Lovegrove, chief commercial officer of Peach, said last month in Singapore. “Whenever we do promotion or day-trip promotions, it’s snapped up in hours. We really do see strong demand for that route.”

Still the Abe administration’s pledge to stimulate the economy to meet a 2 percent inflation target rate may extend the decline in Japanese visitors into next year, said the Korean tourism institute’s Lee.

Madoka Sano, a 19-year-old college student from Tokyo, said she visited South Korea with her parents when the Japanese currency was stronger. “I used to go to duty-free shops but the yen has weakened,” she said. “The price there isn’t much different from here.”

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