While rising numbers are in line with government plans to welcome 60 million tourists by 2030 to help offset struggling areas of the Japanese economy, the hotel industry faces in own challenges in keeping up with growing demand for rooms.

Last year, hotel construction starts doubled to 1.96 million square metres, reaching an 18 year high. Major hotel operators are rushing to open before the Tokyo Olympics in 2020 – Marriott leads the pack with five properties as it rebrands existing hotels.

Meanwhile, small local hoteliers are also keen for a slice of the tourism boom. Many of the country’s traditional love hotels are transforming themselves into cosy and low-priced “boutique hotels” to fill a gap in the lower-end of the market.

“It is natural for love hotel owner-operators who see decreasing revenue to convert their properties into hotels targeting inbound tourists. In fact, this phenomenon was seen in Seoul, South Korea five-six years ago, when Seoul was packed with Chinese tourists,” says Tom Sawayanagi, International Director of JLL Hotels & Hospitality Group.

Sawayanagi adds that as Japan traditionally lacks lifestyle boutique hotels, brands such as Andaz, Moxy and Edition are bringing something new to the market. Andaz Tokyo opened its doors in 2014 while Moxy launches in Tokyo and Osaka this year, and Edition is planning two properties in the capital in 2020. Even Japanese lifestyle brand Muji is offering its own version of hospitality in Ginza in 2019.

Accommodation beyond hotels

Japan has not been immune from the burgeoning home rentals market led by the like of Airbnb. However, new laws for home-sharing services aim to stamp out some of the less desirable side of the sector and help to provide more regulated options to give travelers a greater choice of high quality accommodation.

“Japan has seen massive illegal quasi-hotel operations of residential homes in recent times. The Osaka city government recently reported that the room count under the illegal operation was estimated at one-third of the hotel rooms,” says Sawayanagi. “Once the so-called Airbnb law is enacted in 2018, it is expected that some (if not all) of the illegal operations will be wiped out from the market.”

Managing supply and demand

But could Japan be heading for a glut with supply soon outstripping demand? The industry is already raising alarm bells over the spike in rooms. “There has been a rapid growth of the hotel industry from 2013 to 2016 and this year seems to be a period of consolidation,” observes Sawayanagi. “New supply is likely to peak in 2019.”

Hotels in Tokyo and Osaka, in particular, could be run into problems as many of Japan’s repeat inbound travelers head off to explore other destinations within the country. Sawayanagi points out: “In addition, the high average room rates in city centres of Tokyo and Osaka are likely to drive travelers to satellite cities. At the same time, travellers could now opt for Airbnb-styled accommodation as a cheaper, more accessible alternative.”

There’s still reason to be optimistic. Japan remains on track to achieve 40 million visitors by 2020 as growth rate hovers around 15 percent annually. Japanese authorities announced a year-on-year increase of 16.8 percent when a record 2.68 million tourists arrived in the past July alone.

The relatively favourable exchange rate for foreign travelers certainly has a role to play, says Sawayanagi. “Moreover, the yen appears to be steady for the near future, staying at its current exchange rate, which bodes well for inbound travelers,” he adds.

Handling the influx

The biggest challenge to Japan’s accommodation sector in future times may not be oversupply but shortage of labor. Due to a lack of construction workers and increasing demand for building projects linked to both the Olympic Games and hotels, construction costs are kept high.

The labour crunch, especially in resort areas, affects operating costs and ultimately the bottom line. “If the Japanese government is serious to boost the tourism market, it needs to think about an opening-up of the labor market by easing labor visas,” points out Sawayanagi.

Current geopolitical uncertainty in the Korean peninsula might affect tourism too. But for now travelers remain undaunted; travel agencies in Hong Kong report that there has no decline in the numbers flocking to Japan. And for Japan’s accommodation market, the immediate focus is very much on playing catch-up.