Industrial Report (c) JETRO, 2007

Japan’s Hotel Industry

Japanese Economy Division

Summary
Hotels continue to grow both in scale and number in the Japanese market. In response to
growing numbers of both domestic and overseas travelers, hotels of varying purposes and
prices have appeared since around 2000. The hotel market has reached a turning point now
that the markets for luxury and accommodation facilities have begun to polarize.

1. Market Overview
Japanese lodging facilities can be broadly divided into hotels, traditional inns, family-run
guesthouses, pensions and membership resort clubs. The market earned ¥3.33 trillion in profits in
2005, a 0.5% increase over 2004, and hotels accounted for one third of this. Japanese-style inns
and guesthouses continued to decline, but hotels grew in scale and number (figs. 1 & 2).

Fig. 1 Lodging Facility Market Size

(¥ billion) Traditional inns Hotels
6,000 Pensions Guesthouses
4,944 4,698 Membership resort clubs Total
5,000 4,673
4,534 4,463 4,3274,376 3,762
4,185
3,980 3,982 3,518
4,000 986 3,643 3,313
1,012 3,411 3,328 3,328
933 1,014
1,063 967 990
844
3,000 1,056 1,021 1,025
1,000 1,018 1,023
1,016 1,013
3,502 3,011 1,041
2,000 2,605
3,202 3,152 2,208 2,019
2,844 2,324 1,970
1,000 2,776 3,155 2,071
2,831 1,979
2,446 2,142
0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Source: Japan Productivity Center for Socio-Economic Development

Fig. 2 Number of Lodging Facilities

(Number of facilities) Hotels Traditional inns Lodging facilities

120,000
108,032
104,046 102,854
112,071
100,000
101,494 99,176 97,267
94,908 92,744
90,343
80,000 87,927

77,269
60,000 73,033
68,982 67,891
66,766 64,831 63,388 61,583 59,754
58,003
40,000 55,567

20,000 7,769 7,944 8,110 8,220 8,363 8,518 8,686 8,811 8,990
4,970 6,633

0
89 93 97 98 99 00 01 02 03 04 05

Source: Ministry of Health, Labour and Welfare

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Generally recognized hotel categories include city hotels, location-based resorts, luxury
hotels and medium-priced facilities, along with “business hotels” for business travelers (Fig. 3).
The market for hotels that focus purely on lodging facilities has expanded in recent years.

Fig. 3 Hotel Categories

Luxury, High-priced Hotels

Luxury hotels
City hotels
Park Hyatt Tokyo
Conrad Tokyo Imperial Hotel
Mandarin Oriental Tokyo Hotel Okura
Grand Hyatt Tokyo Hotel New Otani
Ritz-Carlton Osaka Four Seasons Hotel Tokyo at Chinzan-so
The Westin Tokyo
Daiichi, Hilton,
Prince, Tokyu
Accommodation Community
Specific hotels hotels

Toyoko Inn Business hotels

Route Inn
Washington
Single-use Hotels Super Hotel Multi-use Hotels
Sun Route
Villa Fontaine
Tokyu Inn
Keio Presso Inn
Nishitetsu Inn
Choice Hotels
Accor
R&B
Solare Hotels
Luxury hotels

Growing polarization
Accommodation
Capsule
hotels hotels

Casual, Low-cost Hotels

Source: Yano Research Institute Ltd.

2. Industry Trends
A notable trend in recent years has been cases in which Japanese or foreign entities bought
out and revived slumping urban hotels, etc. in regional markets (Fig. 4). According to Thomson
Financial, there were 25 hotel and other lodging facility M&A transactions with a declared value
of $341 million in the 1990s. However, much faster growth took place between 2000 and 2006,
with 173 transactions and a declared value of $2.79 billion. The majority consisted of mergers and
acquisitions between Japanese companies, but cross-border (out-in) transactions rose from six in
the 1990s to 29 from 2000 onward, accounting for around 20% of all transactions from 1990 to
2006.
Buyers, sellers and governments were the underlying factors propelling increased M&A in
hotels and other lodging facilities. Among sellers, two key motivations were, first, to qualify for
impaired asset accounting from as early as March 2004 (such accounting would become
mandatory from March 2006) and, second, to dispose of non-core operations. Buyers sought to
realize improved profits as asset prices declined, and new mechanisms became possible to link
financing and real estate, such as securitized real estate products and Japanese REITs. These
developments coincided with the government’s interest in using tourism to energize local

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economies. They were also linked to efforts by the Industrial Revitalization Corporation of Japan
and Development Bank of Japan to stimulate regional tourism.

Fig. 4 Hotel/Lodging Facility M&A with Japanese Firms (completed deals)

(Number, US$ million)
Total
Number Declared value Cross-border Between domestic firms
Number Declared value Number Declared value
1990 1 - 1 - 0 0
1991 1 - 0 0 1 -
1992 0 0 0 0 0 0
1993 1 - 0 0 1 -
1994 1 229 1 229 0 0
1995 1 9 1 9 0 0
1996 4 - 0 0 4 -
1997 1 - 1 - 0 0
1998 2 1 0 0 2 1
1999 13 102 2 33 11 68
2000 11 47 1 - 10 47
2001 23 793 4 147 19 646
2002 17 249 0 0 17 249
2003 20 830 4 808 16 23
2004 43 278 12 220 31 59
2005 34 375 4 22 30 353
2006 25 217 4 - 21 217
1990-1999 25 341 6 271 19 69
2000-2006 173 2,789 29 1,196 144 1,594
1990-2006 198 3,130 35 1,467 163 1,663

Data as of February 2, 2007. Includes membership lodging facilities, campsites, apartments and boarding houses,
as well as hotels and motels. Announced values are totals of figures that have been released and do not include
amounts that have not been publicized.
Source: Thomson Financial

International hotel Fig. 5 Change in Room Occupancy Rates by Districts

chains rushed to build and
operate luxury hotels once the 85.0 (%) Greater Nagoya 83.0
Japanese economy began to Greater Tokyo Southern Kanto
expand in 2002. As other 80.0 79.7
78.9 79.8
companies moved to increase 77.5 Greater Osaka
Hokkaido 76.9
the value of their properties
75.7
and surrounding areas by 75.0 75.1 73.5 All-area average
74.5
incorporating luxury hotels as 72.7 74.1
anchors for the redevelopment 70.0 Southern Kyushu
Northern Kyushu
of urban centers, foreign hotel Chugoku
operators moved in to fill the Tohoku
vacuum in luxury hotels. 65.0 Shikoku
Existing hotels prepared for Northern Kanto Koshinetsu
the increased competition 60.0
through major refurbishing, 2002 2003 2004 2005
which played a key role in the
expansion of demand. Source: Ohta Publications Co., Ltd.
Occupancy rates of around
80% were achieved at hotels in the greater Tokyo, Nagoya and Osaka areas in 2005 (Fig. 5).
New market entrants operating hotels with limited functions focused on overnight stays have
increased. Domestic and foreign investment funds, realties, rail companies and other firms have
purchased business hotel chains that ran into trouble after they over-diversified during the bubble
period. They have employed franchising and other methods to rapidly expand locations and raise
brand recognition, attempting to grow their markets by attracting longer-staying non-corporate
guests.

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3. Market Entry Process

The construction and operation of hotels requires careful attention to relevant laws and
regulations, including the Building Standards Law, Hotel Business Law and Food Sanitation Law
(Fig. 6). Hotels offering lodging and services for foreign guests can receive fixed asset tax breaks
and other favorable tax treatment by registering under the Law for Improvement of International
Hotel Facilities (Fig. 7).

Fig. 6 Main Hotel-Related Laws

Law URL
Hotel Business Law law.e-gov.go.jp/htmldata/S23/S23HO138.html
Building Standards Law law.e-gov.go.jp/htmldata/S25/S25HO201.html
Fire Defense Law law.e-gov.go.jp/htmldata/S23/S23HO186.html
Amended “Heart Building” Law (accessible public transport for www.mlit.go.jp/jutakukentiku/build/barrier-free.html
aged/disabled) law.e-gov.go.jp/htmldata//miseko/S32HO026/H18HO091.html
Food Sanitation Law law.e-gov.go.jp/htmldata/S22/S22HO233.html
Public Bath House Law law.e-gov.go.jp/htmldata/S23/S23HO139.html
Entertainment Establishment Control Law law.e-gov.go.jp/htmldata/S23/S23HO122.html
law.e-gov.go.jp/htmldata/S24/S24HO279.html
International Hotel Facility Improvement Law
hotel.nihon-kankou.or.jp
Japan City Hotel Association standards www.jcha.or.jp

Foreign investors should Fig. 7 Government-Registered Hotels and Inns

understand the key roles of travel
agents, wholesalers and specialized (Number of businesses)
wholesalers. Individual customers 2,500
2,050 2,045 2,022 2,010 2,011 2,007 1,996
generally use a travel agent rather than
2,000
making reservations directly with a
hotel. Using travel agents can mean
1,500
that hotels earn less profit, but can also 1,063 1,083 1,085 1,095 1,103 1,125 1,127
cut sales costs and attract a broad range 1,000
of customers. In recent years, more
people have begun booking rooms 500
Hotels
through the Internet, making it an Traditional inns
important sales channel alongside 0
travel agencies. Diversification of sales 98 99 00 01 02 03 04
has become important due to the Source: Tourism Department, Policy Bureau, Ministry of Land,
extreme difficult of individual hotels Infrastructure and Transport
undertaking sales on their own.
Food procurement for facilities with their own restaurants can involve in-company
distribution, route sales and commercial wholesalers. The latter is the most common method
because it assures stable, efficient procurement, although it also necessitates the payment of
margins to middlemen and can limit the range of products sourced. Another Japanese business
custom involves the use of trading companies for the outsourcing of activities such as
merchandising and bill collecting.

4. Outlook
Excess accommodation has become a concern in view of new hotels scheduled to open in
central Tokyo by 2008, as well as existing hotels undertaking major facelifts. However, demand
from domestic leisure travel is already strong and is expected to remain so (Fig. 8). Baby boomers,
who will retire en masse starting in 2007, are interested in the environment and culture (Fig. 9), so
it should be possible to develop new demand from this group through strategies that strategically
emphasize location, target marketing and high-quality facilities and services.
Measures to waive short-term visas for travelers from China, Korea, Taiwan and other East
Asian countries are expected to help boost visitations (Fig. 10).

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Fig. 8 Top 20 Preferred Leisure Activities

2003 2004 2005
Domestic travel (hot spring, to escape heat Domestic travel (hot spring, to escape heat Domestic travel (hot spring, to escape heat
1 1 1
or cold, etc.) or cold, etc.) or cold, etc.)
2 Dining out (not including everyday meals) 2 Dining out (not including everyday meals) 2 Dining out (not including everyday meals)
3 Going for a drive 3 Going for a drive Overseas travel
3
4 Overseas travel 4 PC (for games, hobbies, communications) Going for a drive
5 PC (for games, hobbies, communications) 5 Overseas travel 5 Movies (not including on TV)
6 Movies (not including on TV) 6 Lottery 6 Aquarium, botanical garden, museum, zoo
7 Lottery 7 Watching videos (including rentals) 7 Concerts, recitals
8 Aquarium, botanical garden, museum, zoo 8 Movies (not including on TV) PC (for games, hobbies, communications)
8
9 Karaoke 9 Aquarium, botanical garden, museum, zoo Karaoke
10 Watching videos (including rentals) 10 Karaoke 10 Lottery
11 Hiking, picnics, strolling outdoors Watching sports (not including on TV) 11 Hiking, picnics, strolling outdoors
11 Listening to music (CDs, FM radio,
12 Concerts, recitals 12 Gardening, yardwork
records, cassettes)
Listening to music (CDs, FM radio, Listening to music (CDs, FM radio,
13 13 Bars, drinking establishments, pubs 13
records, cassettes) records, cassettes)
14 Gardening, yardwork 14 Hiking, picnics, strolling outdoors 14 Amusement park
15 Amusement park 15 Gardening, yardwork 15 Watching videos (including rentals)
16 Events, expositions 16 Concerts, recitals 16 Events, expositions
17 Bars, drinking establishments, pubs Video games (at home) 17 Exercising (without equipment)
17
Swimming (at a pool) Events, expositions 18 Swimming (at a pool)
18
Watching sports (not including on TV) 19 Jogging, distance running 19 Traveling back to home town
20 Jogging, distance running 20 Fishing 20 Theater (not including on TV)
Source: Japan Productivity Center for Socio-Economic Development

Fig. 9 Travel Styles Envisioned in Next Decade Fig. 10 Foreign Tourists in Japan

0 20 40 60 80 100
% Total (right axis)
82.0
Korea (Number)
Emphasis on environment 87.4 1,800,000 7,000,000
87.6 Taiwan
Prefer unfamiliar destination to 73.8 U.S.
80.3 1,600,000
familiar China
76.0 6,000,000
Prefer to travel with friends rather 72.0 Hong Kong
59.8
than alone 75.2 U.K.
1,400,000
Prefer traditional to modern 67.7 Australia
83.4 5,000,000
destination Philippines
82.6 1,200,000
66.0 Canada
Two nights or more rather than day
63.0
trip or one night, two days Thailand
64.4
4,000,000
Study up rather than going without 61.8 1,000,000
knowing anything 59.0
55.3
Full travel experience rather than 53.0
55.1 800,000
easy trip 3,000,000
49.6
Arrange on one’s own rather than 50.4
taking a tour 45.6 600,000
37.1
44.5 Total 2,000,000
A notch up rather than inexpensive 43.3
Male baby
53.7 boomers 400,000
Travel that emphasizes experiences 35.9
23.6 Female baby
over sightseeing 20.7 boomers 1,000,000
200,000

Source: Japan Productivity Center for Socio-

Economic Development 0 0
96 97 98 99 00 01 02 03 04 05
Source: Ministry of Justice

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5. Trends

A. Foreign Luxury Hotels to Continue Opening

International hotel chains have rushed to build and operate luxury hotels (Fig. 11), with two
major openings scheduled for 2007. New openings in Tokyo will fall off temporarily after the
spring 2009 opening of the Shangri-La Hotel, Tokyo, but luxury hotel openings appear to be
spreading to regional cities, such as the Grand Hyatt Fukuoka, Nagoya Marriott Associa Hotel and
The Ritz-Carlton, Osaka. The St. Regis, the top luxury brand of the Starwood Hotels and Resorts
group in the U.S., will be invited to operate in Osaka, according to an article in the February 7,
2007 issue of Nihon Keizai Shimbun. An InterContinental Hotel is scheduled to open in Okinawa
in 2008. Many anticipate the boom in foreign luxury hotel openings will spread nationwide.

Fig. 11 Foreign Hotels in Tokyo

Hotel Location Year opened
Four Seasons Hotel Tokyo at Marunouchi Marunouchi October 2002
Grand Hyatt Tokyo Roppongi April 2003
Conrad Tokyo Shiodome July 2005
Mandarin Oriental Tokyo Nihonbashi December 2005
The Ritz-Carlton, Tokyo Roppongi March 2007
The Peninsula Tokyo Hibiya Fall 2007 (scheduled)
Shangri-la Hotel, Tokyo Marunouchi Spring 2009 (scheduled)
Source: Above companies’ Web sites

B. Domestic Airlines Sell off Hotels

All Nippon Airways Co., Ltd. (ANA) announced a capital partnership with InterContinental
Hotels Group (IHG) in October 2006, resulting in the founding of IHG ANA Hotels Group Japan
LLC. to operate the 31 hotels ANA owns in Japan.1 After the new company began operating in
December 2006, it announced the sale of 13 properties directly operated by ANA. Although ANA
hotel operations have maintained solid business results, management will be delegated to the new
company so that ANA can strengthen the competitiveness of its core airline operations.
Japan Airlines (JAL) is also in the process of restructuring. Reports indicate JAL will sell its
share in the Hotel Nikko Tokyo’s holding company to an American investment fund. JAL also
announced it would extricate itself from the risk involved in asset holdings and strengthen its
outsourcing operations as part of a medium-term business plan released in February 2007. It also
announced it will concentrate resources on airline operations, and hopes to strengthen its financial
condition and competitiveness by selling off 30% of its shareholdings in JALUX Inc., the operator
of its air terminal shops.
These moves by both airlines are seen as a return to focusing on core businesses, which
could serve as a new business model for the Japanese tourism industry.

Reference

JETRO Japanese Market Report #75, Hotels

(http://www.jetro.go.jp/en/market/reports/jmr/)

1
Establishment of limited liability companies is permitted under the New Corporate Law enacted in May 2006. For details, see
Japan Economic Monthly, “Reforms Under the New Corporate Law,” August 2005. www.jetro.go.jp/en/market/trend/jem