Cast your minds back to 2019, a frequently referenced year as the pre-pandemic moment, when Japan was eagerly looking forward to 2020. Japan was due to host the Olympics, experience a rapid growth in tourism and showcase the best of an amazing country.

In the world of aviation, new international capacity was being added at Tokyo Haneda, resulting in some carriers splitting services with the slightly out-of-town Narita.  Whilst other airlines were able to move their whole networks to the centrally located Haneda facility. Everything was looking good and then the pandemic hit.

Japan was one of those countries that effectively closed its borders to all for three years. And while perhaps not grabbing as many headlines as China, remains a market struggling to fully recovery as a combination of geo-political, social, resource and economic factors continue to frustrate that rebuild. At the turn of the century, the Japanese aviation market was the second largest in the world with a highly desirable mix of domestic and international airline capacity - with a clear split between Tokyo’s two airports making for some interesting connectivity issues. Fast forward to this year and they are now the fourth largest globally, so what has happened?

Geo-Politics Are a Big Issue

Japan’s international airline network has been significantly impacted by the closure of Russian air space, perhaps more so than any other market. Overflying Russia was a crucial aspect of Japan’s air service for both European and North American airlines, and the extended flying times are significant. From every major European airport flight times have been extended to allow for routings across Central Asia in an easterly direction and frequently via a polar routing on the return westerly sectors. Adding two hours or more to any flight obviously increases direct operating costs. However, in a world of pilot shortages operating sectors requiring “heavy” crews of four on the flight deck can be a waste of valuable (and expensive) resources for any airline. 

With no sign of the current situation changing, airlines face an impossible dilemma. The Japan to Europe and North American markets, once extremely lucrative, now face challenges that have led to reduced operating frequencies compared to pre-pandemic levels. For example, over one in four flights from Helsinki are no longer in operation.

China’s Recovery Impacts Japan

In 2019, China was the largest international market from Japan with 12.5 million scheduled seats and a one-fifth share of all seats. This year, China has slipped behind South Korea remaining stubbornly 29% below the 2019 high with 8.9 million seats currently planned and a reduced market share of 15.5%.

Aside from the regular business demand between the two countries, Japan was also an attractive short-break destination from China, with luxury shopping expeditions to the high-end shops of Tokyo a common occurrence. Today, that market seems to have disappeared as economic conditions in China have hardened; Gucci, amongst others, will be hoping for a rapid recovery given their most recent results.

Reaching pre-pandemic levels of airline capacity from Japan to China by 2027 (at the earliest) is unlikely, given the current shortfall in capacity. And even if capacity does build back, improvements in the Chinese economy and disposable income will be required to support such a recovery.

Travelling Overseas from Japan Is Expensive

For many years, Japan was considered an expensive currency to visit for any tourist. Hotel rates in Tokyo were eye-watering, making any trip a carefully considered decision. In the last few years, Japan has become more affordable for many inbound visitors due to the depreciation of the Japanese Yen. In April 2019, one US Dollar could buy 111.58 Japanese Yen.  This month, one dollar will buy 155.51 Yen, an appreciation of approximately 40%. This, of course, makes it great value to visit Japan, but at the same time makes international travel considerably more expensive than five years ago.

The weakness of the Japanese Yen and its impact on international outbound travel is marked and is impacting some international airline performances. For many Japanese, Hawaii has been a popular international destination and while capacity is back to near normal levels on the routes, demand is much softer resulting in both a reduction in volumes and yields; this market softness being cited by Hawaiian Airlines as a factor in their latest performance report. When most of an airlines’ operating costs are in US Dollars and their major international currency has been the Japanese Yen and it weakens by some 40% then the subsequent results are inevitable.

Japan’s Population Decline

Although not an immediate factor, Japan is one of the few countries in the world where the population has been in decline for some years and that decline is expected to accelerate in the next few decades.

Forecasts predict that Japan’s population could decrease to below 90 million in the next 30 years. Given the country’s low rates of migrant workers (backfilling the population decline), it will require a change in thinking regarding migration to Japan in the coming years. Recent increases to just over 1.8 million migrant workers in 2022, compared to 1.6 million in 2019 are indicative of an easing of entry requirements and a slightly more attractive market. However, the current levels are hardly likely to match the local population decline in coming years.

Adding further concern to the declining population rates is the growth in domestic tourism and a strengthening concern around the impact of overseas travel on the environment amongst younger sections of the population. The environmental lobby in Japan has always been strong and has captured the sentiment amongst many potential young travellers.

In time, Japan will recover to its former levels of capacity although achieving a second or indeed third spot in the global aviation rankings is perhaps beyond their reach in the coming years as others markets such as India continue their rapid growth curves. Aspects such as a strengthening currency and more optimistically a reduction in geo-political conflicts will encourage more capacity back and at some point, the sun will once again rise on the Japanese aviation sector.

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