The Journal The Authority on Global Business in Japan

The hordes of international visitors encountered while taking a walk in Tokyo’s Ginza district or climbing Mt. Fuji are perhaps some of the most visible evidence of Japan’s transformation as a tourist superpower.

However, the impact of Japan’s rise has spread all the way to your neighborhood convenience and drug stores, where tax-free shopping is now possible. The “inbound” revolution is the biggest story in real estate today.

Hotels in major Japanese cities are running close to 90 percent occupancy these days, which means it is getting more difficult and expensive to secure a room, particularly on short notice.

In countries such as the United States or even China, new supply is built to fulfill rapidly growing demand. Japan, as you have heard so many times before, is different. Here, a variety of legal, regulatory, and cultural issues restrict hotel development, limiting future tourism growth.

According to The Japan Times on Jan. 20, the number of inbound visitors for 2015 rose 47.3 percent year on year to 19.73 million, almost beating the government’s 2020 target of annually attracting 20 million international tourists.

Despite such growth, Tokyo’s development pipeline is only about 5,000 rooms, or 4.8 percent of current supply, according to JLL. That is less than one-third of Dubai’s pipeline and less than half of New York’s.

While I give Prime Minister Shinzo Abe’s cabinet high marks for making it easier for Chinese and Southeast Asians to obtain tourist visas, little or nothing has been done to facilitate hotel development. Japan’s hotel stock primarily consists of business hotels: cheap, basic properties with tiny rooms.

Unlike the rest of the world, where mid-range three- and four-star hotels dominate, Japan’s offerings are meager in this category between business hotels and luxury properties.

The major reason is a shortage of land ready for development. The single most transformative step that the central government could take to make more land available would be to amend the traditional lease law allowing tenants the right to stay in perpetuity.

If land and building owners had a way to definitively remove tenants and redevelop their properties, Japan’s huge stock of old and “pencil” buildings would quickly disappear, making room for new hotels and other facilities.

Instead, the central government is looking to legalize minpaku, or Airbnb-style renting of private homes by the night, but so far the policy is full of inconsistencies.

Local governments also need to review their regulations restricting hotel development. When Tokyo Governor Yoichi Masuzoe spoke to the ACCJ in September 2015, he repeatedly mentioned the word “inbound,” stressing the importance of tourism to the Tokyo metropolis.

Yet Tokyo prohibits development of hotels in many desirable, central areas such as Harajuku, Kojimachi, and Kioicho, designated as “cultural districts.”

I have asked the metropolitan government as well as Chiyoda Ward why they allow office buildings but not hotels in cultural districts, but have not received any explanation. Several of Tokyo’s 23 wards also have distinctive residential building requirements, even for small projects, making hotel development impractical.

Kyoto developers also face difficult obstacles. Severe height restrictions, long archeological surveys, and highly uncertain planning processes are major deterrents to development, even though Mayor Daisaku Kadokawa is said to be a strong proponent of new luxury hotels to meet skyrocketing tourist demand.

Given Japan’s bleak demographic outlook, tourism is one of the few bright spots in the domestic economy, so central and local policy makers should try a bit harder to stimulate further growth.