Japan's economy may suffer with a stronger yen

Foreign tourists have significantly boosted Japan's economy recently, but their impact may decrease as the yen strengthens. Analysts say a stronger yen could make visits less appealing. Tourism spending in Japan surged in recent years. In 2023, foreign visitors contributed half of the country's 1.5% GDP growth. This is a major change for Japan, where tourism previously added only 0.1 percentage points to GDP from 2010 to 2019. A weaker yen has attracted tourists, making shopping and traveling in Japan cheaper. However, the Bank of Japan recently raised interest rates due to domestic inflation, leading to a stronger yen. On March 11, the yen reached a five-month high against the U.S. dollar. Experts warn that less tourism could hurt Japan's GDP growth. Weaker inbound tourism could occur if the yen continues to appreciate. However, some believe that the number of tourists, especially from China, could still grow as it hasn’t fully recovered from the pandemic. Despite potential declines in tourism, Japan's domestic economy may improve. A strong labor market and rising wages could boost local spending. Recently, Japan's largest labor union secured a 5.46% wage increase, the highest in 34 years. This suggests that local consumption might become a more significant growth driver if tourism slows. There may also be efforts to manage tourism flows, such as taxes for foreign visitors. Experts believe that while tourism will remain important for Japan's economy, domestic spending might take over as the primary contributor to growth in the coming years.