Japan’s Growing Popularity as a Tourism Hotspot Will Drive Competitive Pressures and Reform in the Japanese Service Sector

Mr. Naoyuki Haraoka's picture

The Japanese service sector is attracting much business attention today from international hotel chains, real estate businesses, and other service companies due to the increasing number of foreign visitors to Japan. Moreover, the numbers will increase significantly due to the upcoming 2020 Tokyo Olympics and Paralympics. However, at this moment, Japanese local service business including hotels, transportation, restaurants, and other tourism related business suffer from seriously low productivity due to poor management. Most such businesses are long-time, family-operated small- to medium-sized enterprises that have never learned modern management techniques. It is possible to raise their efficiency by increasing their return on equity (ROE), which should be easier in the case of a low productivity business with only a small investment. International firms are quite familiar with ROE-oriented management and we already witness examples of non-Japanese multinational corporations (MNCs) getting involved in the management of Japanese local hotels or other tourism related service sectors through M&A or business partnerships. In the run up to 2020, their interest in the Japanese service sector will grow and their entries into local business will become more frequent, too. Meanwhile, the attitude of large Japanese towards local business will change as a result of Japan’s 2015 corporate governance reform which calls for ROE-oriented business management. Large, high productivity Japanese companies likely will transfer their resources from Tokyo to places outside Tokyo in pursuit of higher ROE. After all, Tokyo is already full of high efficiency companies and there is hardly more room to raise ROE. The end result is that the Japanese local service sector likely will feature MNCs competing against large Japanese companies. Such competition in sectors such as lodging likely will yield structural reform and enhanced efficiency. This is a good news for the Japanese service sector generally and Japanese tourism sector specifically.