Amid recession fears, Hawaii economists are cautiously optimistic that the state’s economy will fare well thanks to returning Japanese visitors and construction spending, according to a University of Hawaii Economic Research Organization report issued Friday.

The return of visitors from Japan – hindered by the late removal of Covid-19 travel restrictions and the weakened yen – is expected to help offset the anticipated pullback of mainland arrivals next year, the report said.

“The recovery of Japanese visitors has barely begun,” UHERO Executive Director Carl Bonham said in an interview.

Beachgoers enjoy Waikiki Beach as tourism has returned and Covid-19 infection rates in Europe are spiking.
A UHERO report predicts visitors coming to Hawaii will increase to 9.65 million next year. Cory Lum/Civil Beat/2022

The report came after the Federal Reserve raised interest rates by half a percentage point this week, raising concerns from some economists that the hikes will do more harm than good.

UHERO said forecasts of uncertainty in the broader economy have increased since the last quarterly report, which was issued in September.

“A best-case scenario would see a rapid decline in U.S. inflation, allowing an early interest rate retreat. If inflation proves intractable, the Fed will raise rates higher and longer,” UHERO wrote, adding that war in Ukraine and Covid-19 pandemic in China “could further worsen global conditions.”

But Bonham said Hawaii appears poised to avoid a recession even as the outlook on the global economy continues to darken.

Tourism is one of Hawaii’s main economic drivers, bringing in $2.07 billion in state tax revenue in 2019, according to Hawaii Tourism Authority figures. But the industry took a hit during the coronavirus pandemic, which brought international travel to a halt in 2020.

UHERO reported that the Hawaii visitor numbers have fully recovered. It also predicted that visitor numbers will increase to 9.65 million in 2023 from 9.28 million this year.

U.S. visitors, who account for 80% of all arrivals in the state, are the main drivers for tourism recovery so far, according to UHERO. October 2019 figures showed that the number of U.S. visitors remained more than 15% above the 2019 peak.

Canadians represented more than a third of international tourists, according to the report, noting that Japanese travelers were lagging behind expectations.

“The forecast for Japanese visitors is quite a bit weaker than our last one, but for U.S. visitors and non-Japanese and non-U.S. visitors – so Canadians and everybody else – is stronger,” Bonham said.

That’s because the weakened yen is weighing on Japanese consumer spending, including vacations in Hawaii.

“There aren’t as many Japanese visitors here because the currency is weaker … it buys fewer dollars for every yen,” he said.

Bonham said the exchange rate in 2020 was about 107 yen per dollar. However, he said it’s now 130 yen per dollar, adding that it costs 25% more.

“Because the vacation is more expensive, some of them choose not to come,” Bonham said. “If the yen starts to get stronger by 2024, our forecast is to be 122 yen to the dollar instead of 130. So as the yen strengthens and they have to spend less yen to buy a dollar, then vacations become cheaper.”

UHERO predicted that Japanese visitors will increase to 743,000 in 2023 from more than 211,000 visitors this year.

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