Analysis by Kelsey Fenerty
Japan’s growth in hotel revenue per available room (RevPAR) has remained extremely impressive over the past 15 months – a function of a later opening post-pandemic, above-average inflation, and an influx of international demand. That’s largely reflected in average-daily-rate (ADR) growth, although through much of 2023, the first and third points helped drive double-digit occupancy increases as well.
Occupancy growth has trailed off, however, with single-digit increases or declines year over year for the past five months. At the same time, rates have grown more than 20% year over year for each of the past 19 months and show no signs of deceleration.
Indexing performance provides further insight into what’s happening. Even as the ADR index continues to climb, the occupancy index has languished at around -10% for the past six quarters, suggesting that present-day occupancy levels are the new baseline for Japan.
Occupancy growth has largely stabilized across all days of the week, further supporting this theory. Weekends are slightly weaker – befitting the end of revenge travel – but there’s not significant variance in growth levels between days of the week. In other words, there’s no lopsided or single demand driver propelling the industry and putting future demand growth at risk.
ADR growth is similarly stabilized, if much stronger and with less deceleration in growth. This is the more interesting story, because historically, pricing power in Japan has correlated with high actual occupancy levels. With present levels still 10% below their historic average, the extreme ADR growth stands out.
Inflation, the number one factor driving ADR growth nearly globally, does play some role. With costs rising, hoteliers are to some extent forced to push room rates and increase revenue.
The scope of the rate growth runs well beyond inflation, though, even at the historically high levels reported over the past year.
There is one final macroeconomic factor at play – the exchange rate. The Japanese yen depreciated rapidly beginning in early 2022, with value relative to USD falling 26% between January 2022 and April 2024.
While initial spikes in ADR growth coincided with true pandemic recovery, for the past year or so the lift has largely been impacted by the depreciating yen.
Depreciation started in early 2022, and Japan reopened borders to international tourists late the same year. With the value of the yen declining, international arrivals found Japanese hotel rates significantly less expensive than locals, and the strong demand from inbound international travel helped increase pricing power.
Source markets do play a key role here – China, a major historic Japanese source market, has yet to make any significant return to Japan, in part due to a later opening post-pandemic and in part due to geopolitical tensions.
Japan has more than offset that loss, however, with long-haul U.S., western Europe, and Australian travelers, who benefit from the yen’s depreciation and typically book longer lengths of stay.
However, international arrivals don’t spread equally throughout Japan and hotel performance trends have very much split along domestic-international market lines.
Markets highly reliant on international inbound demand – Tokyo, Osaka, Kyoto – report incredibly strong rate growth and decent occupancy growth. More domestically driven markets, like Kansai (excluding Osaka and Kyoto) and Tohoku, are actually losing occupancy and barely driving rate at all.
For the domestic markets, the story is straightforward: Even with limited growth year to date, hotel rates across the country are running 20-30% ahead of pre-pandemic levels. Domestic travelers are simply getting priced out.
Future rate growth in Japan depends on how the Bank of Japan handles the continued yen depreciation, and if/whether the government can help stimulate domestic demand, through travel subsidies or other measures.