Return of Japanese visitors may be just in time to save Hawaii’s economy

The flagging US economy will slow Hawaii’s economic recovery as inflation and high interest rates erode consumers’ purchasing power, economists at the University of Hawaii predict in a sobering economic forecast released Friday.

But there is continuing cause for optimism, according to the University of Hawaii Economic Research Organization. The recovering tourism industry shows no signs of wavering, reports UHERO.

Even if the mainland United States plunges into a recession, UHERO predicts that Japanese travelers returning to the islands after years of absence will be enough to keep one of Hawaii’s top employment sectors going.

JAL Japan Airlines and Hawaiian Airlines at Daniel Inouye Airport.  Honolulu International Airport.  June 5, 2017
The return of travelers from Japan could save Hawaii from a recession, economists say. Cory Lum/Civil Beat

“Hawaii may escape overall net job losses, thanks to a recovery in Japanese travel that is now finally underway,” reports UHERO.

The prediction came as Japanese Prime Minister Fumio Kishida announced on Thursday that Japan will lift the daily arrival cap and allow visa-free travel from October 11. Kishida also announced a nationwide visitor travel discount program, The times of Japan informed. Japan had previously eased Covid-19 testing requirements for travelers, but a cap on daily arrivals limited the number of flights in and out of Japan.

Hawaiian Airlines, the state’s largest private employer and dominant carrier, called Kishida’s announcement a cause for optimism.

“Obviously, that’s a very big change,” Theo Panagiotoulias, Hawaiian’s senior vice president of global sales and alliances, said in an interview from Tokyo.

There is significant pent-up demand for travel to Hawaii in Japan, where the theme of Hawaii as a vacation spot is woven into the community, Panagiotoulias said.

Previously, in places like South Korea, Australia and New Zealand, pent-up demand translated into increases in visitors when those governments lifted restrictions, he said.

“In all the geographies we serve, the phenomenon of pent-up demand was very real,” he said.

At a news conference Thursday, UHERO CEO Carl Bonham drew up the forecast, which he produced alongside UH economists Byron Gangnes, Steven Bond-Smith, Peter Fuleky, Justin Tyndall and Rachel Inafuku.

Bonham is also a member of the Hawaii Revenue Council, which provides forecasts that state government officials use to anticipate the tax revenue that will be available to them. Additionally, UHERO’s supporters include major players in the business and nonprofit sectors, making the organization’s reports benchmarks for discussions of the economy.

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“There’s a chance that Hawaii can get through this without much of a recession, and that’s what our forecast says,” Bonham said of the continent’s looming recession. “And it’s mainly because we’re still in recovery mode.”

A boost from Hawaii’s largest international market is key, he said.

“We think that for the first quarter we will be back to around 50% of pre-pandemic levels for Japanese visitors,” he said. “You can imagine starting to see businesses that cater to Japanese visitors starting to come back.

“If we go back to 50% of pre-pandemic levels, businesses will definitely feel the difference,” he said. “You will see an increase in wedding business and some retailers that were really affected, as well as food and beverage, will start to see an increase in traffic.”

That’s good news for a massive ecosystem of larger companies, as well as entrepreneurs like Mami Kagami, owner of A La Maison de MAnYU Flowers. Kagami, an accomplished florist from Tokyo, once had a team of 15 floral arrangers who arranged weddings for Japanese visitors at hotels including The Kahala, Sheraton Waikiki, Moana Surfrider and Modern Hotels. But all that dried up with the pandemic.

Kagami was able to keep her Moiliili store afloat thanks to the federal SBA Paycheck Protection Program and a rent discount from her landlord, she said.

But finally, with no sign of the Japanese wedding business returning, Kagami turned a corner and converted some upstairs rooms of her floral studio into a Japanese antiques and French porcelain shop. He now also holds occasional pop-up events in the space, such as Japanese matcha tea ceremonies for local residents and international visitors.

The commercial space has allowed him to expand his customer base, Kagami said, while he hopes the flower business will improve.

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“If I could mix them at the same time, that would be the best,” she said, referring to the home goods store and florist business. But he is not optimistic about Japan’s return to Hawaii, in part because the weak yen has made travel to US destinations more expensive.

“It doesn’t look good,” Kagami said.

Mami Kagami, florist
Mami Kagami, owner of MAnYu Flowers and A La Maison, a homeware gallery, worries that the weak Japanese yen will continue to keep Japanese visitors away. Stewart Yerton/Civil Beat/2022

Bonham and Panagiotoulias don’t think that’s the case. Both addressed the weak yen and high hotel room rates, which are on average 30% higher than before the pandemic, peaking at $388 per night on average in June. Bonham acknowledged that Japanese visitors might have less extra money to spend on shopping and activities, but he still predicted that they will return.

So did Panagiotoulias. The same factors were in play when other markets opened and tourists were still pouring into Hawaii, he said.

Furthermore, he said, people in Japan have been largely employed during the pandemic, working and accumulating savings.

“I would say that people are looking for an opportunity to spend that,” he said.

Tourism is still king in Hawaii

UHERO’s forecast underscores what appears to be a fundamental truth about Hawaii: The economy depends on tourists.

Despite agonizing talk of diversification as the Covid-19 pandemic exposed the risks of relying so heavily on tourism, policymakers showed little ability to change anything. Gov. David Ige brought in former Hawaiian Electric CEO Alan Oshima as the state’s “Economic and Community Recovery and Resilience Navigator,” but it was never clear what Oshima accomplished.

In another effort, during the height of the pandemic, Ige’s director of economic development and former chief of staff Mike McCartney proposed that the state could create nearly 40,000 jobs for displaced hotel workers by training them to work remotely to national and international companies. But those jobs never materialized.

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Bonham said that is not a surprise.

“We really didn’t believe it in the first place,” he said.

Inflation is squeezing households

And that leaves tourism. The good news is that the resurgence of the visitor industry is keeping Hawaii’s economy afloat. The bad news: It’s still not easy here.

While Hawaii’s inflation rate has been lower than the US as a whole, which reached 8.5%, Hawaii’s rate still touched 7.5% in March, meaning that Hawaiians are paying much more for goods and services in a place where the cost of living was already making it difficult for people to survive before the price increased. That means many households are spending $3,000 to $3,500 more a year to get by than before inflation spikes in prices, Bonham said.

“Our 7.5% inflation rate for many households is as bad as the national rate,” he said.

Federal Reserve Chairman Jerome Powell has made it clear that controlling inflation is a priority, and the Fed will continue to raise interest rates to make it harder for people and businesses to borrow and spend money. UHERO was referring to a meeting in Wyoming this summer when Powell said the Fed will keep raising rates even if it spells pain for businesses and households.

Still, Bonham said, Hawaii could avoid the broader pain of a looming recession on the mainland.

“We are not in sync with the rest of the country,” he said.

He called the notion that what happens on the mainland also happens in Hawaii, soon after, “an urban myth.”

Still, Bonham said, a lot depends on Japan. If Japanese travelers don’t arrive as UHERO predicts, and the US economy continues to decline, “Hawaii would probably be in a recession,” he said.

Hawaii’s Changing Economy” is supported by a grant from the Hawaii Community Foundation as part of your CHANGE Framework project.