#144: Barbarians at the Shrines: Deciphering Japan

Sept 15, 2024; 20 min read

[The 74 ton temple bell at Chion-in, Kyoto]

Japan has a growth problem. The overall population is in structural decline, retirees are the only local demographic which is growing, broad-based immigration is a political non-starter. Despite interest rates being near zero for two decades, there have been only faint sputterings of growth.

• Population...............................................……........123,719,238 (2023 est.)

• Population growth rate ............................................-0.41% (2023 est.)

• Birth rate..................................6.9 births/1,000 population (2023 est.)

• Death rate.........................11.74 deaths/1,000 population (2023 est.)

• Net migration rate...0.74 migrant(s)/1,000 population (2023 est.)

[Source: CIA World Factbook]

So if the population is shrinking and immigration is marginal, then tourism (very short term immigration) is the only other way to gain some modicum of demographic growth (or at least offset shrinkage in other areas). If the infrastructure of the country remains largely static while the population shrinks, it stands to reason that capacity utilization will continue to fall, therefore crowdedness and traffic issues prevalent in other countries will be far less of a problem in Japan.

Tourism to the partial rescue

In July, Japan set another record level for inbound tourism.

The data show that 3.29 million visitors (+5.1% from June [the previous record], +42% from one year ago, and 10% higher than pre-COVID July 2019) came to the land of the weakened yen. Actually I think there are more useful statistics, which multiply the number of visitors by the average stay (~7.5 days), because longer stays obviously have more of an economic impact, or by the average spend per stay (~Y212,000), in order to normalize tourist visits into citizen-equivalent economic impact. Using an estimated 2024 estimate of 35 million visitors, that would imply 719,000 citizen-year equivalents in terms of time (35mn x 7.5/365), and 1.6 million citizen-GDP equivalents in terms of expenditure (tourists spend a lot more per day than the average citizen). Although tourism accounts for around 1.2% of total GDP, it’s growing fast and it is on the same level of magnitude as the overall population shrinkage.

The Aug 9th issue of the Economist updated its Big Mac index, which purports to use an item of roughly constant quality available globally to empirically determine overvaluation or undervaluation of currencies; the two most undervalued currencies were the Taiwan dollar, and the Japanese yen. I’m not sure whether they reflected the recent ~12% appreciation of the yen — in any case, it doesn’t really matter, even with that move, the yen is still mind-bogglingly underpriced.

Although my favorite inexpensive dumpling shop is in Taipei, when I was there in May, I didn’t come away with the sense that Taiwan was especially cheap. Perhaps Taiwanese just need larger discounts to eat Big Macs because there are so many other wonderful alternatives. In any case, the NT$ (currently USD = NT$31.95 ) is near the middle of its relatively narrow band of 28-35 to the USD over the last 25 years, whereas the yen in the same period has a low of Y75 (2012) versus the recent high of Y162. 

The economic reasons for the weak yen are usually attributed to interest rates; the US Fed has set a relatively high interest rate (5.25%), while Japan’s policy rates are still nearly zero, which means investors get paid far more to own USD than JPY. This regime started in 1Q2022, when the Fed started an aggressive hiking cycle to get inflation under control (the JPY was ~Y113 at the time), is fading out, as the US Fed gets set to start cutting interest rates, just as the Bank of Japan is starting a hiking cycle.

Perhaps because I’ve lived in Tokyo through periods of both weak yen and very strong yen, the current level feels plain silly, but for the economic reasons explained above, also justifiable… so, justifiably silly?

The weak currency has the country on sale

The inexpensive yen has driven inbound tourism in Japan to new records (while decimating outbound tourism), and caused frisson between locals who have time-honored ways of doing things, and tourists who (not only in Japan) can be assumed to do roughly whatever the hell they please. My new related hypothesis is that Parisians aren’t rude at their core, rather it is the never-ending barrage of gauche tourists which exasperate and annoy them until normal human tendencies kick in – I’m starting to see early signs of tourist-induced stress-related avoidance (not outright rudeness yet) in Tokyo, which is being inundated with loud / narcissistic / unaware yokels from all over the world. Of course I’m not implying that all tourists to Japan are yokels, the vast majority of Japan visitors are polite and culturally sensitive. But as tourist numbers go up, and foreigners group together, bad behavior naturally increases and makes headlines. Recent news includes poking holes in a barrier meant to keep away unruly tourists at a scenic overlook of Mount Fuji, harassing the maiko going to work in Gion in Kyoto, skipping out on hospital bills, etc.

I was on a corporate earnings call the other day with Japan Airlines where they mentioned that hotel prices in Hokkaido have been driven up by tourists so much that they can see a notable bias for domestic passengers to avoid Hokkaido, compared to historical patterns.

And the other day I was in the old part of Tokyo visiting a tonkatsu restaurant I have frequented for 32 years – although the clientele is still almost all local, my counter-mates were talking about the sheer horror of visiting their favorite places and finding them teeming with tourists. In particular, the world of tonkatsu has been deluged with tourists (who appear to think locals subsist entirely on pork cutlets and sushi). This is slightly ironic because the concept and even the word tonkatsu is a portmanteau of ton (pork) and katsuretsu (cutlet/cotelette), originating from the Meiji Era when Japan decided that it needed a little more foreign influence.

The world of high end dining has been upended as well – and with Tokyo being a certified Eden for gourmands, this was bound to become a problem. Compared to their Western counterparts, high end Japanese restaurants have far fewer seats, so demand can quickly overwhelm supply. Although Sukiyabashi Jiro, made overly famous by the fawning documentary, forces his star-struck clientele to wolf down an entire meal in 30 minutes, this is far from the relaxed norm (proper seatings are usually 2 hours apart) — it should resemble a mindful Zen experience, closer to fly fishing on a deserted bend in a river, not a TikTok reel with a repetitive meme song. Japan experienced this crowding issue briefly around 2008-2010 (when the yen was under Y100), with a variety of Asian nouveau riches clambering to the top echelon of Tokyo establishments — the 2011 earthquake and fear of nuclear contamination completely reversed this trend and dispersed the temporary tourists, until the post-COVID / weak yen period we are in now. 

From the restaurant perspective, notoriety will naturally attract new people — if you fear being besieged by newbies with ever-present phone cameras, then it’s better to stay under the radar and let the Michelin reviewers check out the shiny place next door. It’s unreasonable to believe that the best places can exist as an oasis just for old-timers, however, so the question is how to handle a rapid influx, or rather, how can you manage their quality and behavior so that the ambiance isn’t adversely affected, while still allowing new relationships to form. 

From the perspective of a new (foreign) client, it’s a daunting proposition — expectations are elevated, the bill will induce vertigo (even without the need to tip), it’s an inscrutable culture, and there are various levels of communication gaps.  It seems like the most friction occurs because of a difference in treatment between first timers and regulars, something which repeatedly emerges in the most negative reviews. I find this partly amusing because in a Western restaurant, first timers and regulars are largely treated with equal indifference, so having any interaction with the chef should be taken as a positive.

Japanese restaurants aren’t like Uber or Lyft — they don’t have an explicit five star rating system for customers, to separate the well-behaved, high frequency clientele from the unruly periodic yahoos… except they do have a rating system — it’s just an implicit one. Perhaps even more than the digital ratings, which are often gamed and have little nuance, any well-managed restaurant has extensive knowledge about their best clients. What the first-timers fail to understand is that the regulars have relationships (five stars?) dating back many years, whereas their default transactional mindset feels they are getting short-changed because they experience a slight but obvious service differential… which appears like racial discrimination to them. Perhaps if the restaurant showed the relative status of each client in their seating position — a little like airline loyalty, where passengers naturally accept the differentiated boarding process — they would complain less. If a regular is dining, they have a five star rating at the highest loyalty tier; a tourist newcomer is an unrated customer who, given the statistics in their cohort, will be a 3-4 star one-off client, and unlikely to become a loyalty member… so they should be pleased that they have the experience at all. A Japanese first-timer, especially one who has been properly introduced, has a higher probability of becoming a regular, and will be treated with this possibility in mind.

The term “omakase” is firmly entrenched in the lexicon of the global gourmet, and yet now has the secondary meaning of ‘ultimate Japanese experience’ rather than what it actually means, ‘leave it to the chef,’ because the omakase set is usually the highest level course at most sushi restaurants. Logically, however, letting the chef decide is a much richer experience when he knows the client’s preferences and has a historical context of they have eaten and enjoyed, rather than with a first-timer, where he a) has to assume each client fits a general stereotype, b) he has little incentive to get to know their habits because it’s unlikely they’ll become regulars, and c) there are far more cringeworthy moments when tourists ask if there’s a vegan menu or gluten-free soy sauce, or “pearls before swine” moments when they say they hate uni (sea urchin), without ever having experienced it properly. So even the often-used omakase term is a logical framework to the different treatment of first timers vs regulars.

For regulars introducing new clients (an excellent way to grow one’s business organically), one subtle ritual I appreciate is the one at the end of the meal where you (humbly) ask if it’s appropriate to exchange name cards — expressing appreciation for the meal by implying the one-off transaction might possible turn into an ongoing relationship. The response I usually get when I ask if a Western restaurant has any business cards is a finger, pointing to a stack of dusty cards.

Japan has the concept of outer and inner (uchi-soto), and to an extent every society has it (especially the communist ones, ironically) – but it is perhaps more embedded in Japan’s remote island society, famous for the three centuries of isolation (sakoku) during the Tokugawa shogunate – to be fair, this was only aimed at the (non-Dutch) Western powers – there was still regular interchange with China through Nagasaki, and some interaction with Korea. Living in Japan for a long time means that the social constructs become somewhat ingrained, and while fluent foreign speakers of Japanese are generally not experts in the use of honorifics, the sociolinguistic perspective is at least well understood. Many of the places the tourists want to experience are at the high end, highlighting the best that Japan has to offer, but these are also precisely the places where Japanese traditions and customs can be the strongest, therein creating a natural tension.

The latent Proustian snob in me appreciates the different language of a sushi restaurant because it subtly marks the client as someone who appreciates and is familiar with the culture, in a manner that the non-initiated don’t notice. And even with non-Asian guests, the ritual of pouring drinks for guests (and holding the glass if you are the guest) in Japan or Korea is a welcome sign of cultural synchronization.

A recent undercurrent in Japan is that a number of the most famous places are going underground, for fear of having their Zen-like atmospheres overrun by the unwashed hordes – either becoming invite-only, or restricting availability – this is relatively easy when the best places have only 8-12 seats. One of my ex-colleagues started a website service which helps tourists get access to hard to book reservations at a selection of premier restaurants (at an appropriate mark-up) – but getting access is 90% of the battle – the issue is whether this changes the dynamic for locals/regulars (who are aware there will inevitably be some first-timers in attendance).

Fear of being overwhelmed

I’m probably being slightly paranoid – although some people are aggravated, the walls are still standing, and there are always side effects to success. With tourism numbers at all time highs, and likely to keep rising as long as the currency remains anywhere this weak, my hyperbolic analogy generator recalls images of the British redcoats trying to repel a Zulu horde ten times larger, in the Battle of Rorke’s Drift, especially now that visitors from China are starting to reappear (doubling in July from a year ago). Just the other day I was about to visit one of my secret Mom-and-Pop hideaways for dinner when I was preceded by a group of six confused Asian tourists, so I audibled an alternative course, randomly discovering an artisanal cubbyhole which was reasonably priced and served excellent wagyu beef, with the awkward name “Pound-Ya.”

Bubble inflows

I was in Tokyo during the Great Bubble Era (1985-1990), when Japan transitioned from sleepy industrial power to The Japan That Can Say No and the temporary owner of the Pebble Beach Golf Course and Rockefeller Center. During this period, it wasn’t an influx of tourists, it was an influx of career seekers, looking to help the Japanese invest their new wealth around the world, and then spend it as quickly as it multiplied. 

A few decades after the bubble ended, I was reminiscing with one of the old guard assistants, who said she really missed the evenings when four people used to go out and spend Y1mn on dinner (about $7000; USD/JPY was about the same level as it is now) – I said it seems like the country is still paying for those excesses.

That period of career inflow only lasted a few years – perhaps 1988-91 – because the bubble burst in late 1989 which initiated a drawn out contraction period (Japanese real estate didn’t actually bottom out until the mid-2000s); constant belt-tightening does not make for a positive macro employment environment. Non-Japanese professional workers (like me) were heavily focused in the Tokyo financial sectors, although it was also the fertile period to come to Japan to teach English and learn Japanese in the rural areas (and then get a finance job in Tokyo). Businesses (both off-color and above-board) sprang up or expanded to meet the unique needs of the flashy foreign financiers – during that period I was still pre-finance, working as a worker bee in Japanese industry (admittedly a bubbly one), so I didn’t get to experience the excesses in a visceral way – even if the signs of silliness were hard to miss.

Phase shift: Subtle innovation

While I’m riffing on Japan, I wanted to introduce two semi-related topics.

Remote workspaces

Remote work received a material boost from COVID, but the question of remote workspaces, especially when you’re not at home, is steadily evolving — I’d argue there’s more demand than there is supply, in most places. At the global level, I like to use the various Soho Houses, which have locations in many of the cities I frequent, for the purpose of remote workspaces, but this doesn’t work for everyone.

I’ve been spending most of my free time in Tokyo at a ‘shared lounge’ — a concept optimized to fulfill what lots of people actually do at cafes (do work or kill time, while paying for the experience by drinking coffee) — I wonder what percentage of Starbucks customers are really indirectly renting space as opposed to visiting explicitly for the overpriced and over sugared coffee. There are a number of companies with shared lounges all over Tokyo, but I prefer the Tsutaya brand ones — for $10/hour you have a very pleasant lounge with a variety of seating options, liberal snack and non-alcoholic drink options, external monitors to facilitate laptop use, etc. The full day rate is less than $40 (as much as 15 hours); most of their locations have between 200-300 seats, in a variety of configurations — from workspaces to casual areas.

In a traditional coffee shop, where the business model is selling coffee and consumables, the seating area is a side benefit to induce customers, and those who stay a long time are a nuisance. In a shared lounge, people are directly paying for what they want (a comfortable place to work or hang out). The shared lounge model enables less expensive real estate (not high traffic first floors), because people don’t mind going a little out of the way if they plan to stay there longer (and the interior is far nicer than the average cafe).

A peculiarly Japanese feature is the ability to borrow up to three new books from the adjacent bookstore and read them (without paying) while you are in the lounge. This is a far more comfortable extension of the general Japanese bookstore policy of allowing customers to read unpurchased books (while standing up, which tests the endurance of even the most avid readers). Since I’m an advocate of anything which incentivizes people to read more, I hope customers are taking advantage of this benefit. 

The shared lounge concept is similar to what WeWork was trying to do at a far more ambitious (and highly leveraged) level, primarily aimed at corporate entities and startups, whereas Tsutaya is more focused on individuals (a few private rooms are available). Tsutaya started as a bookstore and a video rental company; it was once a listed entity; it was bought out by management in 2011. As far as I can tell, the shared lounge model, which is not unique to Tsutaya (or Japan), has evolved organically over time and spread throughout Japan — Tsutaya has more than 25 locations in Tokyo alone, and they opened three new locations throughout the country in just July. 

Convenience stores

Japan has spectacular convenience stores. They are more in focus than ever because the Canadian firm Couche-Tard has recently launched a take-over bid for Seven & i, the Japanese owner of the Seven-Eleven convenience stores (the #1 chain in Japan).  In the rest of the world, the convenience aspect implies that every other aspect of the store gets short shrift; in the US, the store is usually anchored by an anchor product (gas station, pharmacy). Seven-Eleven started in the US in 1927, and brought the concept to Japan in 1974; a majority stake in the Southland Holding company was acquired by Ito-Yokado (now part of Seven & i) in 1991, and they became full owners in 2005. Although the original concept was American, constant innovation by Seven & i has made it a completely different product offering; the contrast between Japanese convenience stores and Circle-Ks in the US, for instance, is staggering.

In Japan, the convenience stores are marvels of efficiency, selection, and quality – with a far larger range of services available (good intro here).

The idea of eating at a convenience store is pretty normal in Japan, which has a just-in-time model for fresh food. Many of their products are best-in-class – the egg salad sandwiches (I’m a fan), fried chicken at Family Mart (“Fami-chiki”), and even branded convenience store socks (news to me). And the fact that they can provide this amazing service around the country (and increasingly throughout Asia) is ruly mind-boggling, when you are wandering around a Walgreens in the US, or the average bodega in Latin America.

Two changes I’ve noticed in the last few years which highlight Japan’s growth dilemma: my experience is that at least half of the checkout personnel at convenience stores are now non-Japanese (actually sometimes it feels rare to get a native Japanese), and there are efficient automated checkout options, thereby keeping service levels efficient, with minimal demand for local workers. One analyst told me that the government’s policy is “stealth immigration” – relaxing a variety of immigration regulations to encourage inflows, but keeping it on the down-low because it is a sensitive political topic.

Final words

After introducing the growth issue and tourist influx, I brought up the shared lounge and convenience store topics in order to ponder a few points:

• Japan’s growth issue is slowly inducing a variety of necessary changes, including the rise of tourism and stealth immigration as a reasonable counterbalances to demographic shrinkage

• In-bound tourism has been growing at a rapid rate, but may slow as the tailwind of a cheap currency wanes, because of the divergence in the US-Japan interest rate cycles

• Changes in Japan are often slow but effective, the rate of change might be small but it’s probably happening on a constant basis, like a stealthy innovation process

• Within the context of increased tourism, that it is possible to have a diversity of people and still maintain a pleasant environment, predicated on participants adhering to a set of norms

• Growth is an important background for a capitalist society, but the same factor makes it harder to manage customer experiences; Tokyo is an incredibly livable city partly because growth is so modest – there is hardly any traffic compared to other Asian capitals, and evolutionary approaches are more feasible because the society is already wealthy and they don’t have to deal with runaway growth

• Western attempts to develop remote workspaces have been more revolutionary and splashy, while the pace of workspace innovation in Japan has been more evolutionary (and I would contend, more successful from the customer point of view)

• While the concept of the convenience store started in the US, the current state of the art is Japanese, where so many refinements have accumulated that the functionality and customer experience are very different than in the rest of the world

• That many of the aspects of Japan that draw attention from tourists are a function of a developmental mindset that might be slower and less leverageable than Western models, but is still capable of refining the customer experience to extreme levels

• This view feeds my general hypothesis that while Western models are driven by a profit orientation and the timely needs of shareholders, many of Japan’s successful models are developed over time and are evolutionary adaptations which prioritize the needs of broader society. The obvious (generalized) side effects are that it’s better to be a customer in Japan, and a shareholder in the West