After more than two years of strict Covid-19 border controls, Japan reinstated visa-free travel to 68 countries on Tuesday.
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The Japanese yen's slump against the U.S. dollar has sparked some worry in Japan, but that could encourage more travelers to visit the country again, according to analysts — though they say a significant rebound in the tourism sector won't happen without the return of Chinese tourists.
After more than two years of strict Covid border controls, Japan reinstated visa-free travel to 68 countries on Tuesday.
Package tours are no longer necessary, the Japan National Tourism Organization (JNTO) reported.
The daily entry limit of 50,000 people and the on-arrival PCR test at the airport have been scrapped. However, it is still mandatory for travelers from all countries and regions to submit a negative Covid test certificate or proof of vaccination, JNTO said.
With the easing of restrictions and the depreciating yen, tourism to the country will return quickly — especially from Asia, said Jesper Koll, director of financial services firm Monex Group told CNBC.
Koll said that although travelers from Europe and the U.S. are important in aiding Japan's tourism recovery, "the bulk of the enthusiasm and the bulk of travel" still come from countries like Singapore, the Philippines and Thailand.
"The cheapness of the yen obviously increases the probability of tourism contributing greatly to the economy," Koll said. "As the restrictions get rolled back further, and the capacity of inbound flights open up, I expect that we will see inbound spending and inbound tourism accelerate very, very quickly."
In 2019, Japan welcomed 32 million foreign visitors and they spent about 5 trillion yen, but inbound spending is now only one-tenth of that, according to a Goldman Sachs note from September.
The investment bank estimated that inbound spending could reach 6.6 trillion yen ($45.2 billion) after a year of full reopening, as travelers will be encouraged to spend more because of the weak yen.
"Our ball-park estimation points to potentially larger inbound spending of ¥6.6 tn (annual) post full reopening versus the pre-pandemic level of ¥5 tn, partly helped by the weak yen," the note said.
The Japanese currency plunged to a fresh 24-year low and was at 146.98 against the greenback during London's trading hours on Wednesday.
Japanese officials intervened in the forex market in September when the dollar-yen hit 145.9.
"I don't think the yen has been as cheap as it is now in living memory," said Darren Tay, Japan economist at Capital Economics, said on CNBC's "Squawk Box Asia" on Tuesday. "Tourists were already clamoring for borders to reopen … So I think the weak yen will serve as another motivating factor" for them to travel to Japan again.
Although flight ticket prices to Japan have increased since the announcement was made, tourists will still get a bang for their buck when they spend in Japan, Koll said.
"You can eat twice as many hamburgers, twice as much sushi for your dollar here in Japan compared to the United States, and even compared to the rest of Asia," he added.
Chinese tourists 'hold the key'
The outlook for Japan's tourism recovery looks promising, but "the overall impact on Japan's economy may not be a net positive" as Chinese tourists have yet to return, Tay said.
"Chinese tourists actually make up a large amount of what foreign tourists spent back in 2019 … They're still pursuing a zero-Covid strategy so they won't be returning anytime soon," he said.
Goldman Sachs said Chinese tourists, who made up 30% of foreign visitors to Japan in 2019, could return only in the second quarter of 2023.
Once China fully reopens, inbound spending from Chinese visitors has the potential to increase from 1.8 trillion yen in 2019 to 2.6 trillion yen — 0.5% of Japan's gross domestic product, said Yuriko Tanaka, economist at Goldman Sachs.
"Chinese visitors hold the key to a bona fide rebound in inbound spending," Tanaka said.
Without visitors from China, it could take some time before inbound spending in Japan returns to pre-pandemic levels, Koll said. But strong demand from the rest of Asia could drive inbound spending to return "relatively quickly" to over $3 trillion by March 2023.
Outlook for yen
As markets expect the U.S. Federal Reserve to hike interest rates by 75 basis points in November, the yen will continue to weaken as the dollar continues to strengthen, said Koll.
"You've got the widening interest rate differential [between Japan and the U.S.], and the Federal Reserve is not done yet. There is at least one more interest rate hike in the cards," he said.
He added that yen could weaken further toward the 155 level, strengthening only next spring — and that wouldn't be the result of action from Japan, but of the Fed signaling that it has "stepped enough on the brake."