Strained China-Japan diplomatic ties hit Japan's retail, tourism

The economic toll of China and Japan's strained diplomatic ties is looming over Japan's retail and tourism sectors, with a report by BMI, a unit of Fitch Solutions, warning of distinct downside risks if the friction persists beyond the short term.

BMI said that in the short term, Japan faces limited options to substitute missing Chinese arrivals given "fixed airline schedules, group?tour dynamics, and differing spending profiles".

Due to the potential shortfall in arrivals, duty-free complexes, department stores, and luxury retailers in Tokyo, Osaka, and Fukuoka have the highest exposure to a loss of revenue, BMI said.

Over the medium and long term, the report said that while increased demand from Northeast Asian markets, alongside visitors from the United States, Australia, and Southeast Asia, might eventually plug the leak in visitor volume, "fully restoring the high-value retail structure driven by Chinese tourists would prove difficult", given the unmatched consumption intensity of travelers from the Chinese mainland.

This structural challenge is underscored by spending data. Chinese mainland tourists accounted for 6 million, or more than 18 percent, of Japan's 36.9 million foreign arrivals in 2024, consistently outspending other groups. Despite softer domestic consumption, Chinese mainland visitors averaged $1,622 of spending per trip in the third quarter this year, well above the $1,488 average for international tourists in Japan, BMI said.

The market uncertainty stems from recent diplomatic friction fueled by erroneous remarks by Japanese Prime Minister Sanae Takaichi regarding China's Taiwan. Multiple Chinese ministries subsequently advised their citizens to avoid traveling and studying in Japan. In a swift market response, major domestic carriers, including Air China and China Southern, introduced flexible refund policies for Japan-bound routes.