In a recent opinion piece for The Japan Times, Jesper Koll, WisdomTree Investment’s Head of Japan, argued that the growth of inbound tourism to Japan has thus far been the biggest beneficiary of Abenomics, Japanese Prime Minister Shinzo Abe’s economic policies centered around quantitative easing.

Tourism, especially Chinese tourism, has been one of the biggest benefactors of Abenomics in Japan

It has been challenging to fully assess to what extent Abe and his cabinet’s economic policies have succeeded or failed. Nominal GDP growth in 2017 was at a healthy 1.7 percent. However, total nominal GDP fell by 1.84 trillion between 2012 and 2015, the first three years Abe was in office for his second term. Under Abe, the Japanese GDP shrank by almost 30 percent with the implementation of Abenomics in just 3 years (6.203 trillion in 2012 to 4.383 trillion in 2015).

Still, to some extent, a fall in GDP was expected with Abenomics. The policy of quantitative easing was intended to decrease the value of the yen, which in turn would encourage foreign direct investment and fight deflation by encouraging consumers to not push back purchases. It’s also important to note that unemployment is at a historic low of 2.4 percent.

All of this is encouraging, and will hopefully push employers to raise wages to better make up for labor shortfalls, thereby increasing consumer purchasing power and driving overall growth in consumer spending.

Japanese GDP is still far below what it was Abe took office in 2012

However, while economic growth is on an upward trend, but still modest, and it will take many years for the economy to fully return to the level of when Abe took office in 2012 in terms of GDP. The bright spot in all of this, as Koll points out, is tourism.

The number of foreign arrivals to Japan has exploded since Abe took office. According to the Japan National Tourism Organization, Japan attracted 6.39 million foreign tourists in 2011. In 2012 when Abe took office, this figure rose to 8.36 million and reached 28.69 million in 2017. That represents growth of 449 percent in the last six years. This would be impressive for a developing, “up-and-coming” destination. For a highly-developed country like Japan, it’s nothing short of amazing.

Inbound foreign tourism has been growing at explosive rates since 2011

The easing of visa requirements, especially for Chinese tourists, has played a big role in facilitating this growth. However, the impact of lower visa requirements should not be overstated.

The weaker yen was likely the biggest factor in the rapid growth of inbound foreign tourism. In late 2011, the exchange for U.S. dollar to the Japanese yen stood at 1 to 77. Now, the U.S. dollar is worth 105 yen, but in 2015 this figure rose to as high as 124 yen.

South Korea has traditionally been Japan’s largest source of foreign tourists and South Korean citizens have been able to travel to Japan visa-free for some time. Since 2011, South Korean arrivals to Japan have grown from 1.66 million to 7.14 million in 2017, an increase of about 431 percent.

Chinese tourism had even stronger growth during this period. In 2011, only 1.04 million Chinese tourists traveled to Japan, in 2017 this figure stood at 7.35 million. This means that growth in Chinese tourism to Japan for this period stands at a whopping 705 percent.

Since 2011, Chinese arrivals to Japan have grown by 705 percent

While a Japanese visa is much easier to obtain for Chinese citizens than previously, high levels of growth in Korean tourism implies that cheaper prices are a more significant factor. Moreover, the fastest growth in Chinese tourism occurred between 2014 and 2015, when Chinese tourism to Japan grew by 107.3 percent. This was also consequently when the yen was at its weakest.

All of this is an encouraging sign for the Japanese economy. As Koll notes in his piece, “Since 2012 inbound tourists spending has accounted for the equivalent of almost 20 percent of the growth in Japan’s consumer spending (excluding spending on rent).”

Foreign tourist consumption has accounted for 20 percent of Japanese consumer (excluding rent) spending growth since 2012

However, a certain amount of caution is still warranted. Despite the exploding number of inbound tourists to Japan, tourist spending only accounts for 2 percent of all consumption in Japan. This represents substantial growth from near-zero, but the figure is still small.

Moreover, as Jing Travel has noted, dependence on tourism to achieve broader macroeconomic goals is risky. Tourism is by default an “unnecessary” expense, in the event of economic uncertainty or instability in any of Japan’s key tourism source markets (China, South Korea, Taiwan, Hong Kong, and the United States), could result in a substantial drop in arrivals.

An over-dependence on tourism spending is risky, especially when China is involved

For Chinese tourism specifically, Sino-Japanese tensions always pose a risk. The travel ban on the sale of group tours to South Korea was devastating for the South Korean economy and tourism industry.

Given that China sees Japan as its chief regional rival and two countries maintain disputes over territory and historical events dating back to WWII, the possibility for another diplomatic incident like that in 2012 and 2013 surrounding the Senkaku/Diaoyu Islands is a very real possibility. This is given even more credence as China has been making efforts in asserting itself politically in East and South Asia.

Nationalist outrage in China over the Senkaku/Diaoyu dispute let to drop in Chinese tourism to Japan from 1.43 million to 1.31 million between 2012 and 2013 and widespread boycotts and protests.