Half a year ago, I and many other students endured another stressful term in the IB curriculum. The first term of Year 13 is unanimously the most stressful; in my case, I had 6 major coursework and examination deadlines all in the minute space of 3 weeks. So it was time for a breather, and since it was the winter season after that stressful period, what better activity to do than snowboarding down the slopes of the Niseko ski resort mountain in Hokkaido, Japan? It was my ideal holiday, no doubt.
Why is Japan so fantastic? Quite simply, they are the whole package. Personally, I love their range of delicacies (sushi, ramen, yakitori, tempura tendon, yummy snacks etc.), well-mannered and friendly people, services, technology, culture, and their remarkable attitude to be on time. However, from an economists' point-of-view, the most impressive thing about Japan is that their economy is very robust. All three of their sectors, Primary (raw materials/commodities), Secondary (manufactured goods), and Tertiary (service-related industry) sectors are mature, meaning low-risk investment and high percentage of profitable returns once the recession has subsided, and producers attempt to resuscitate the economy by generating greater export revenue. In the past, Japan has been very protective of its specialty products. Today, this trading behavior is still seen but to a lesser extent. What's the reason? Simply to increase exports wherever they can, even if it meant making it accessible to consumers outside of Japan and decreasing the novelty of their products.
*"Access to the ultimate luxury" - Last year, 1,500 Kilograms of rarely exported Japanese Kobe beef were exported to Hong Kong supermarkets. All the Kobe beef were sold out in a matter of hours.
Japan has always been conservative when it comes to local traditions and products. In the current economic climate, one could say that it was the correct strategy, as Executive chef of the HK Intercontinental hotel, Erik Idos deemed that Japan were "wise" to open and expand their beef export market. But more importantly, why did they excise this 'closed-off' trading behavior in the first place? Two reasons come to mind. Firstly, it creates a sense of exclusivity of its resources. Japan understands the importance of protecting,
and controlling its resources, thus maintaining its availability to locals. Although exports can increase revenues and access to worldwide markets, the producers produce at a limited volume and only sell them locally. Why? Because products that go overseas do not necessarily reflect the potential profit gain from exporting. For example, goods such as foods/snacks, which have a relatively short shelf life, that go overseas may spoil and result in waste. The same could be said for electronics. With the product life cycle becoming ever-so short, and rapid improvements in technology, goods that were unable to make if off the shelf may never be able to, therefore another source of waste is created. Secondly, and this is quite ingenious, is that all sectors in the Japanese economy could potentially make more money! If the producers decide to export, then the foreign consumers would only spend the amount the good costs, plus an additional cost to the Japanese producers by import tariff. In order for foreigners to access these products, they would have to travel to Japan. Let us map out the journey, during the peak winter season. An average family of four travels by air to Japan, after a merciless price discrimination by the airline companies (peak season flight tickets are more expensive than non-peak season tickets). In Japan, they immerse themselves in the snowy mountains for a week of endless fun and delicious local cuisine. On their last day, they go shopping around in the heart of the city centre for unique goods that are only available in Japan. And finally, they reached the end of their holiday, and hop onto the return flight back home. In comparison, the consumers spend much more money; producers from different industries (e.g. aviation, ski resorts, hotel, food etc.) all acquire a share of the consumption revenue, and the Japanese government receives greater tax revenue. In essence, Japan's reluctance to export certain local specialties eliminates the first option, and because there is only one choice, there is no opportunity cost. Anyway, it seems that this is no longer the case due to the convenient services of internet purchasing.
Since the financial crisis way back in 2007, Hong Kong tourists have had to dig deeper into their pockets to purchase Japanese goods and services because the exchange rate ratio between the two countries were slowly but steadily growing in Japan's favour. It was not actually Japan's economy that was going strong that led to the expanding difference in the exchange rates, but was US's the monetary policy of printing and increasing supply of US$ into the currency exchange market which contributed most. Since the HK$ is pegged to the US$, we couldn't do much about it, and just watch as the yen appreciates relative to the dollar. This was definitely not favourable to Japan as this meant losing competitiveness against other countries, especially in the technology market when large companies like Sony and Panasonic fall behind South Korean technology giants LG and Samsung. With exports and services making up 15% of the economy, it would land a very hard blow to its economy. Furthermore, not only do Japanese exports become more expensive, imports become cheaper too, hence further deteriorates the current account balance sheet.
As a result of the US's manipulation of the exchange rate market, the highest currency ratio of Japan compared to the Hong Kong dollar was around 0.1018 (HKD) : 1 ¥; which means that it requires a little more than $10 to acquire ¥100; that is quite ridiculous considering the high price of Japanese goods.
Moreover, during this period of time, and ever since the 1980's, Japan is actually suffering from deflation! Their first major deflation came from the liquidity trap as a result of over-investment and Japans' failure to cut interest rates quickly enough in the 1980's. Despite Japan's efforts to stimulate the economy by the "public works" project, their economy just would not seem to get going. Through this debacle, Japan has opted for "Quantitative easing" (QE'x', where 'x' is the quarterly period of the economic year), a policy based on the famous Princeton economics professor, Paul Krugman's idea to raise inflation expectations by cutting long-term interest rates, which should theoretically promote spending and investment. Quantitative easing did provide some help by easing the rate of deflation so that prices did not experience a complete sky-fall, but overall it was a menial act considering its ineffectiveness to create inflation. Japan still remains optimistic about the prospects of inflation, as the officials decided to double the economy's inflation rate target to 2%.
With the growing technological prowess from South Korea, and continually strong exports from China, Japan could not afford to lay back and watch their economy crumble under the competition. Fortunately enough, in the last month, Sony announced that it made its first net profit of ¥43 billion in over 5 years in the 2012 financial year. Although the profit figure is very small compared to the company's loss of ¥457 billion from the previous year, it bodes well for the long-term health of the Japanese economy. Lowering interest rates increases the supply of money into the currency exchange market, thus should have the effect of decreasing the value of the yen. As seen this year, it reached its lowest value in recent years of 0.075 (HKD) : 1 ¥. However, with the US irked by Japan's currency value manipulation, and new technology exports like the PS4, economists forecast that the value of the Yen would increase substantially. So for those that are visiting Japan on holiday this summer for the big summer sale (July 1st-27th), this could be the perfect opportunity to buy some before it becomes too expensive. Though that being said, Japan should be quite resilient to US complaints, and US growth is currently outpacing Japan's growth. Overall, to a certain degree, Japan has control over its currency valuation. It is forecasted that with US economy continuing to grow, the yen will drop in value relative to the US, and Hong Kong. This was illustrated by the decrease in value from 0.083 (HKD) : 1 ¥ to 0.079 (HKD) : 1 ¥ (as of 22/06/13).
Japan's new prime minister Mr Abe's 'Abenomics' pro-inflation policies are starting to show some effect. Instead of just continually lowering interests rates close to zero, the Japanese Central bank is aiming to increase the circulation of money within the economy, hoping to interest investment opportunities, and increase consumption. As with any policy, its effect would not be instantaneous, but it will be interesting to see if there will be any observable effect to the Japanese economy in the coming years. For now, whether the Japanese economy improves depends on local investments from domestic producers. If they do not act, "there is likely to be no positive contribution to gross domestic product", says UBS global economist, Paul Donavan.
Anyhow, back to my Niseko snowboarding trip. To my mind, Niseko is a wonderful place to explore the difference in the economics between winter and summer. Basically, Niseko can be divided into two conditions. Firstly, on the winter end of the spectrum, Niseko is a truly magical destination for any winter sport lovers. But why? How different is the snow compared to other ski resort areas? Looking more closely, snow is a natural occurrence that arise from a drop in temperature that converts what is originally rainfall into frozen water. If we treat snow as a natural resource, then there is no difference in the actual snow anywhere else in the world. So what makes Niseko different from other Japanese ski resorts that certain individuals crave so much for? The quantity of snow plays a large factor. On average, the Niseko ski resort area receives an average of 14m of snowfall, with a 10% standard deviation; statistical comparison also shows that Niseko averages the highest snowfall throughout the winter season. Additionally, in the 2011/12 ski season, out of 147 days of snowfall, only did it not snow in 27 days (percentage total of 94.5%). A frequently snowy resort keeps the place busy with tourists, thanks to the special powder snow experience and spacious mountain. They indeed market this mountain feature very well through variety of means such as on their website, posters, television advertisements.
*"Snowy heaven": Skiers immerse themselves into the powdery goodness Niseko has to offer.
Another quite interesting economic feature in the Niseko village is the competition between convenient store giants: Seicomart and Lawson. Below are some initial observations of the two stores:
- Seicomart and Lawson are similar in size
- Seicomart and Lawson typically sell the same goods. Key difference is that Seicomart has more raw ingredients (eggs, ham, vegetables etc.), while Lawson sells hot, ready-made foods (e.g. deep-fried chicken, yakitori etc.)
- Both stores have a carpark facility in front of the store
- Relative price of Seicomart goods are slightly more expensive than Lawson
- Seicomart has 5 times the number of customers
At first, it seems strange that Seicomart have that many more customers than Lawson; in fact, I'd prefer the attractive lower priced goods in Lawson. Most features apart from some deviations in price, and the selling of raw and/or cooked foods, are identical. So what makes Seicomart have such a great advantage over Lawson? It does not seem that brand name or personal preference affect the market conditions between the duopoly. Answer? Location. Stores that sell either commodities or similar goods, who position themselves strategically to draw in demanding customers will have an overwhelming advantage.
From above, we can see that although both Seicomart and Lawson are located on the main road, Seicomart is within the perimeter of concentrated tourist areas while Lawson is on the outskirts of the Hirafu villlage. Tourists want convenience, and the short distance from their residence to Seicomart provides that convenience. Walking/Jogging/Running/Crawling to Lawson is not exactly what tourists want to do, especially during winter, and after a muscle-aching, full day of skiing/snowboarding.
Furthermore, Seicomart's insistence on selling raw ingredients is very perceptive. In the not so distant past, in an attempt to develop the Niseko area (and to raise money), the Japanese hierarchies sold a significant proportion of the land to private investors, thus transforming the Hirafu area into a property hotspot. As a result, there are many people that have purchased private property (houses and apartments) as holiday homes. There are also many people who prefer to rent a house rather than to stay in hotels since there is much more freedom to explore the shopping and dining places. Meals are usually not provided if one chooses to rent houses. Although there is a satisfactory number of dining places, majority of these restaurants are Japanese, and more suited to lunch and dinner. That leaves the problem of the most important meal of the day: breakfast. Since there isn't any fancy breakfast buffet like you get in most hotels, they would have to cook there own breakfast, using raw ingredients from Seicomart. Despite the slightly higher prices, consumers wouldn't mind not being too frugal with their money. Overall, Seicomart trumps Lawson in the battle of convenience due to its location, as well as tapping into the needs of the consumers.
Another option is to head for the nearest train station town, Kutchan-cho (倶知安町). There, the town has a very large supermarket with a plethora amount of goods, much more substantial than Seicomart and Lawson combined. Aside from the supermarket, there are also several restaurants (ramen, yakiniku etc.), bookstores, and shopping malls to name a few. Even before that, how do people get there from Hirafu? There are only two options; either take a taxi (around ¥4000 for round trip), or the scheduled bus for ¥100 (free for return trip). Although the taxi is much faster, it becomes the 'marginal' choice in this case due to it not being economically viable compared to the bus.
"All aboard the big red bus!": Hirafu and Kutchan-cho bus link transport
Because the Niseko bus is perceived, and treated as a public transportation service, the price is generously low. It fits the requirements of a quasi-public good/service; the bus service is non-excludable, but is rivalrous since there are limited bus seats available. What I find most extraordinary is the ¥100 price. Are they hoping to be socially efficient? Is is in the nature of Japanese people to be altruistic? Maybe maybe not. Ski resorts are seasonal, so any type of producer should aim to maximize his/her profits before closing in the summer. With the price difference being so large, frugal consumers would almost always choose to ride the bus. Once the bus service has established its dominance as a necessity to those who wish to enter Kutchan-cho, we realize that our demand is very inelastic. So why not raise the price to ¥200, ¥300? It will undoubtedly still be less expensive than cabbing. The only plausible reason I could think of is that the comparison between Hirafu and Kutchan-cho is minimal in terms of necessities. Sure, Kutchan-cho has a large supermarket, but Seicomart and Lawson can meet all our necessities during our trip. Moreover, Hirafu also have many high quality restaurants, so there is no specific need to go there to savour delicious Japanese cuisine.
"Japanese cuisine under the culinary spotlight": Local Japanese restaurant along Hirafu main street. Appetizing appearances in harmony with the fantastic, fresh flavours.
So this gives rise to the question: what will I benefit from going to Kutchan-cho when everything I need is already in Hirafu? I will leave it to you to answer this one.
The next issue is equipment rentals. Renting snowboards, skis, and their respective shoes are fantastically expensive. Below is a link to the Niseko 'Ski Japan' rental prices:
http://www.nisekobase.com/rental-pricelist/
Let us focus on snowboarding. After researching various snowboard prices from experts, the average cost of a snowboard package is around $500 USD, or around ¥47200-¥47300 following the current exchange rate. Is it better to buy your own snowboard equipment or rent it? To start off, most people who snowboard are unlikely to view it as a one-off experience. Usually, failures from trying something could create an incentive to try again until they succeed. Judging from this possibility, it should be assumed that those who snowboard are likely to mark it as a long-term activity. Next, let us consider the rental price of 5 days (proper holiday should be around at least one week or so) of snowboarding for standard adults (¥22500). Taking the above prices, and the possibility of repairs on purchased boards, one would expect to more than cover the cost of buying a board by renting equipment only 3 times. Furthermore, by buying a board, you can guarantee its quality, and suitability to the individual's specification. Rent involves a temporary use of an asset. For short term usage, then renting is favourable. However, since we expect these activities to be long term, having ownership of a fixed asset becomes less expensive.
Immediately, we see that there is third-degree price discrimination between adult and child board prices (identical activity of different size, assume same quality and type, and no difference in supply). This price-discrimination arises from the amount of materials used to produce boards of different sizes, and the choice of activities available. For families with children, they could either send them to ski school, or if all of them have capable ability to ski/snowboard, then the family could ride the mountain routes together. The former scenario grants the parents with several activity choices (e.g. sight-seeing, horse-riding etc.) other than skiing/snowboarding, since their children are left in the care of certified instructors. However, the latter scenario narrows their choice to two; either proceed with the activity together, or not at all. Either way, a parents' top priority in a foreign country is to ensure the safety of their children. Given that the family spends so much money to come to a ski resort and not ski, is quite similar to paying for a prostitute but not having intercourse. Therefore, the adults' course of action is driven by their children, which is no surprise really. There is also a similar second-degree price discrimination because the the average price of renting the equipment decreases per day. These organizations are undoubtedly skilled in extracting consumer surplus.
So what about summer? Seasonality is once again playing it's natural, crafty role. When I went during the 2012 summer Hokkaido road trip, Hirafu was eerily quite. All the shops, hotels, and restaurants are closed for business, and the mountain slopes are being repaired. It feels like staying in a ghost town! Seasonal unemployment would increase
initially in all the Japan ski areas for nearly all types of labour. Overtime, some of these labour would relocate to other ski areas, or other part-time occupations where their labour skills are utilized. For example, store clerks could find employment in other stores as salesmen/women, and ski instructors on the northern hemisphere can continue their jobs on the southern hemisphere, though the labour workforce demand is much less due to the lesser number of ski resort destinations compared to the nothern hemisphere. Nevertheless, we should expect employment increase in other industries during winter to summer transition. To combat the seasonality problem in the summer, people would shift the factor of production, mountain land, for other purposes. In Hanazono (花園), the small ski resort area to the east of Hirafu, their summer activity club involves mountain biking, rafting, hiking, golfing, canyoning, the zipline, and the infamous bag jump. Despite the attractive activities, since they marketed themselves as a ski resort, these activities become somewhat out-of place. There are many other places to do these activities for much cheaper prices; therefore, the need to go to Japan becomes obsolete. And because of this psychological mentality, it too is subjected to the effects of seasonality.
But as the saying goes, "all good things must come to an end." That's right, one week of snowboarding just flew by in the blink of an eye. On board the big tourist bus to New Chitose airport. The departure floor was full of souvenir shops, selling the local snacks I love. Personally, I think the best thing about these shops are that consumers could sample the snacks. Usually with all types of snacks, our sources of information are limited to the appearance and information on the packaging. It is important in gastronomy that we obtain information of the foods' sensory qualities (especially taste, smell, texture). In an economic sense, we as the consumers will have acquired more information about the goods in the market, hence narrowing the disparity of asymmetric information. That being said, almost all the snacks are so delicious that it does not matter whether I taste or not. Nevertheless, it is economically favourable to have more information of a product.
But even more interesting, is the competition between rival stores. The competition almost resembles perfect competition. This scenario is made possible from the homogeneous goods, identical prices, and same service. Actually, these stores act as retail wholesalers, and I have confirmed that all the goods come from the same producer, so we can assume that all the goods are of same quality. Below are some pictures of these shops.
For the second row of pictures, all the shiroi koibito, 白い恋人 (chocolate sandwich biscuits) are ¥1100. Then for the third row, the Royce Chocolate potato chips are ¥693, and Royce Chocolate popcorn are ¥525. From this, we can see that three different shops sell exactly the same goods for the same price. There is no choosing between them; you can pop into your closest shop, having the confidence and
knowledge that whatever good, it is the same everywhere else. Or is it? If you happen to have time and someone who can carry a lot of things after you've gone through customs, then you could reap the benefits of less expensive duty-tax free goods.
After the duty tax was alleviated, the Royce Chocolate popcorn is ¥500 (original price = ¥525), and the Royce Chocolate potato chips is ¥660 (original price = ¥693). Both goods become 4.762% less expensive.
Similarly, the 白い恋人chocolate biscuits is now ¥1058 (original price = ¥1100); meaning that the price decreased by 3.812%.
Well that is it for my Japan holiday. Thank you all for the continued support, and I hope you have enjoyed reading this, I must say, rather long post.
