FOCUS: Polarising Market: winners and losers in Japan’s leading city markets

Japan is facing a major drop off in population over the next 40-60 years – and the decline has already begun. Government forecasts expect a reduction of as much as a third of the current 127 million people. But not all cities or regions will lose population as quickly as others and some will actually increase. In Japan’s Top 100 Markets: Now to 2025, JapanConsuming has produced the first ever English language guide to Japan’s leading markets. The main conurbations, and especially the cities around Tokyo, will see an influx of new residents as people move for better access to entertainment, services, health care and jobs. These cities will gain the lion’s share of investment and marketing of consumer goods and services. The new report helps to work out which markets to focus on.

Japan’s biggest consumer markets often seem pretty obvious: Tokyo, Yokohama, Osaka, Nagoya, Fukuoka, Sapporo and so on, but there are in fact huge disparities in consumer power among these larger conurbations. There are also other smaller cities and towns with higher consumption, or higher capacity to consume, on a per capita basis. Knowing which are the best markets for a particular brand, product or service is a vital and complex task.

To make this easier, JapanConsuming has published a new report, Japan’s Top 100 Consumer Markets: Now to 2025. The report is the culmination of analysis of over 120 datasets and 10,000 data points, including population now and future to 2040, migration, land values, businesses, labour force, incomes & savings, consumption, retail sales, store numbers, restaurants, and prices. The result distills Japan’s more than 1,700 municipalities down to the top 100 (along with additional data on the 23 central Tokyo wards), giving marketers a clear map of where to focus investment.

Hokkaido

The northern most island region is likely to face mixed fortunes over the next 10 years. It is a relatively wealthy place, with a high proportion of land ownership, and Sapporo is a thriving major city. However, other Hokkaido cities have high ratios of older people, and relatively fewer children, meaning that there will be significant population decline in coming years. Savings levels are particularly low, and there is an excess of large store capacity in second tier Hokkaido cities which will worsen as populations decline.

Tohoku 

Tohoku suffers from a rapidly ageing population and by 2040 it will see the biggest fall in population, down more than 25%, especially in Akita, although Fukushima may well experience a worse decline. Sendai, while one of the smallest of the major cities, is a centre of economic activity – many people young and old are moving to Sendai and surrounding areas for work or services, a trend already strengthened by the exodus of people from the Fukushima area.

Kanto

The Kanto region centred around Tokyo is and will remain the economic and consumption power base for Japan. Population will continue to shift towards the capital as younger people move for work and seniors for greater access to services and increased convenience. Twelve of the top 20 cities in terms of population stability levels to 2040 are located in Kanto.

Despite how it may feel, Kanto has a lower volume of retail space per capita than any other region, but does have the highest sales per store. Land values have actually risen in Tokyo in the last decade – the only prefecture to do so apart from a slight increase in Aichi. Consumption Expenditure in absolute terms is higher in Kanto, and especially in the outlying, suburban areas in prefectures surrounding Tokyo.

Chubu

Northern Chubu (Hokuriku) has several key centres, notably Niigata, Kanazawa and Fukui. With the exception of Niigata, population is sparse. Ageing is also a problem for this area; after Hokkaido, northern Chubu will see the second largest falls in population to 2040. Incomes in Ishikawa and Toyama are relatively high and overall expenditure is fairly strong in these cities too but retail coverage is sparse.

Southern Chubu (Tokai), forming the ‘Shinkansen Corridor’ between Tokyo and Osaka, is a prosperous region. It is home to some of the strongest cities in the country, notably Nagoya and Shizuoka, with relatively stable populations to 2040. Aichi Prefecture has several growing and similarly prosperous cities which, while small in population terms, are growing with still under-developed retailing. Income levels are mostly more than 10% above the national average.

Kinki

The Kinki region has the second largest population after Kanto, just ahead of Chubu, but levels of prosperity on some measures are lower than Chubu and even Kyushu. Expenditure is the lowest of all the main regions, although incomes are fractionally higher than lowest ranked Kyushu – within the main Osaka/Kobe area incomes are actually lower than Kyushu. Yet expenditure on food is the third highest in Japan. Kinki has the third highest concentration of retail stores, second highest sales densities, and third highest sales per store, reflecting its importance as a commercial centre for Western Honshu.

Chugoku

Chugoku suffers from having the third oldest population with serious depopulation expected in the next decade and beyond. Incomes and expenditure are the third lowest among the regions, although spending on housing is the second highest – houses average 112 sqm, the third highest in Japan. Apparel spending is the lowest among the regions, as is education. There are just a few exceptions to this picture of decline emerging as regional powerhouse cities.

Shikoku

Shikoku is the smallest of the four main islands and has the smallest and oldest population too, expected to fall by around 25% by 2040 to less than 3 million. Despite the hollowing out of some key industries, wealthy land-owners and powerful local businesses mean that Shikoku’s average income per household is the second highest in Japan and they tend to spend it too, with the highest expenditure in Japan by region. Shikoku has the highest amount of retail space per capita in the country.

Kyushu

Kyushu has the fourth largest regional population and the youngest one too, but Kyushu’s prosperity and economic activity is concentrated in a few winning cities. There are good levels of income and expenditure in the biggest cities, but overall the average is dragged down by the poorer areas, resulting in the lowest average incomes in Japan and the second lowest savings. On the other hand, the cost of living is affordable, with land values decimated in the last decade and access to cheap locally produced food. Retail sales are the fourth highest in Japan.

City Polarisation: Flowering oases within dusty deserts

The report reveals clear trends and shifts in Japanese city consumer markets:

• Significant migration across and within regions to economically vibrant and well-serviced cities
• Migrants are both young Japanese looking for work opportunities and seniors looking for convenience and essential services
• Migration is benefiting both the big regional capitals like Tokyo, Nagoya and Osaka as well as prefectural hot spots
• These migration trends are being matched by corporate investment, including retail development, creating virtuous circles of gain, but causing polarisation: dynamic cities within depopulating and economically bereft deserts, resulting in inflows of human and financial capital to some key cities at the expense of the rest
• These trends will strengthen over the next 10 and 20 years due to population decline and the cycle of more migration, more investment, more migration
• Additionally, the nature of family migration exacerbates this trend, given family preferences for high service and economically dynamic locations, so leading to future generations being further concentrated into certain cities.

In essence what we are witnessing in Japan is a polarisation of commercial and consumer activity in a small group of winner cities at the expense of the rest. The implications of these shifts for international brands, retailers and service businesses including financial firms, are significant. Any city or town that today is seeing minor emigration or small signs of economic decline is unlikely to be a good long-term investment target due to the likelihood of accelerated decline in the future.

Consumer Power is widely spread

JapanConsuming’s Consumer Power Ranking of the top 100 cities uses over 120 different datasets crunched to establish what are the top 100 markets in terms of consumer power, with weighting applied to consumption and commerce.

Tokyo is not surprisingly number one in the top 100 Consumer Power Ranking and Yokohama is second. Osaka is just fifth due to low incomes and expenditure compared to other large cities. Hiroshima, just behind in sixth place, has almost half the population of Osaka, but higher levels of prosperity thanks to its role as capital of the entire Chugoku region. More surprising to many will be the strength of Saitama and Kawasaki, which are third and fourth respectively.

Saitama City has become a powerhouse in recent years thanks firstly to the merger with Omiya and Urawa, which were already significant cities in their own right. Together Saitama version 2.0 makes up a sprawling city spread across the northern Kanto Plain, mixing highly paid commuters from Tokyo with strong local industries and services. Lower rents mean that Saitama continues to generate population growth, a factor that is leading to significant levels of new retail development too.

Kawasaki is rapidly emerging as one of the most popular places in Kanto to both live and locate businesses thanks to lower land values than Tokyo and Yokohama, and rapid, convenient transport links to both of these cities. Heavy investment in new housing, as well as in redeveloping old industrial zones as both residential and commercial districts is helping. The local government is also better than most in building services such as schools, clinics and even large parks. Kawasaki has a strong future.

There are other cities in the top 100 taking on a similar role, sucking in economic activity and population at the expense of nearby cities that are smaller, less attractive, or simply poorly managed. Some of the other winners include Sapporo, Kanazawa, Wakayama and so on. In some cases the pull of such cities, and the counterpoint decline in nearby rivals, is so strong that these prefectural or regional capitals are becoming the only contenders for investment or brand marketing in their respective regions.

Smaller cities in outlying regions especially are suffering from net emigration of people, trade and industry, as well as mostly ageing populations. With less economic activity to go round, Japanese are voting with their feet, moving not just to places with jobs, but also congregating in the bigger communities of larger cities where better health and welfare services can be found.

Population: migration a magnet for investment

A large population is key for consumer power, but it doesn’t guarantee it. Osaka is third in population but fifth in consumer power, Sapporo fifth in population but 10th in consumer power. As significant are the percentage of younger people in the population mix, work prospects, incomes, the appeal of the city to migrants, and linked to this, prospects for population growth to 2025.

Analysis of cities with high levels of future population growth combined with investment in housing and retail shows some clear winners. Tsukuba leads this ranking of expected population growth, followed by Kawasaki and then other surprising regional cities. Common to all is their proximity to major regional capitals, with good transport links, but reasonably low land values, and good environments for families to live. This lures in not only residents from regional capitals but also migrants from outlying prefectures looking for work or, for older people, convenient access to essential services.

Tsukuba itself is a model example of a city ideal for focus by marketers over the next decade. Key to its growth was the opening of the Tsukuba Express train service linking to Akihabara in just 45 minutes. This makes for an ideal commute for the many workers in the financial and commercial districts of Nihonbashi, Ginza, Marunouchi and Otemachi. Tsukuba is also a planned new town, with wide open spaces and well thought out services, a form of city popular with families. The high level of investment thanks to Tsukuba’s role as an academic and private research hub also means a stable and well paid local working population. Retail investment too, notably by Aeon, means good locations for stores. As a result of this optimal mix of investment and migration, Tsukuba is expected to become the biggest city in Ibaraki in the next 10-20 years, and one of the most important satellites for Tokyo.

Many of the cities with strong consumer power also tend to have the highest proportion of children under the age of 15. These are often concentrated in specific regions, notably a large cluster in Aichi such as Anjo and Okazaki. Some of these are small cities, and so are lower in consumer power ranking overall, but lifted by their future potential growth.

Incomes higher in the regions 

Many of the cities with the highest incomes per household are not in or near Tokyo Prefecture. Tokyo is only 13th in average incomes, and Osaka 56th. Yokohama is only 22nd but neighbour Kawasaki is fourth. The city with the top average income is in fact Kumagaya in Saitama due to the high percentage of working age population, the number of affluent commuters who use the bullet train to get to central Tokyo, and the strong commercial base in the area. Kumagaya also has the 10th highest expenditure.

Other top cities by incomes also tend to be economically vibrant cities in each region, often, but not necessarily, the prefectural capital. Kanazawa in Northern Chubu is a good example. This has been one of the wealthiest regions in Japan for 400 years thanks to fertile land, the strong merchant class and plethora of high level craft industries such as gold leaf, lacquer and pottery. Today employers include high tech companies, tourism and services – Kanazawa is home to one of the country’s top IT universities too. It is likely to retain its prosperity, partly thanks to its tradition of independence from Tokyo, leading it to reach out beyond Japan through exports and inward investment.

In terms of expenditure, Anjo is number one thanks to high incomes in this popular commuter town – yet it still manages to enjoy the highest average savings in Japan too.

By expenditure category, Tokyo is number one in food, reflecting the higher cost in the capital as well as the many households buying prepared foods, especially working singles. In household goods, most of the higher spending cities tend to be in the regions, where larger houses demand higher expenditure, and where there is a stronger tradition of DIY. For apparel, cities in or near the main urban conurbations feature strongly, especially prosperous suburban cities to the west of Tokyo such as Musashino, whose residents spend the highest proportion of total expenditure on apparel in the country.

Retail hubs get stronger

Retail sales by city correlate with the population ranking, reflecting the impact of the latter on the former, but with some important exceptions. Osaka’s population is 1 million less than Yokohama, but its retail sales are higher because Osaka is a retail destination for much of the surrounding area, including Kobe, a fact reflected in its having the second highest retail sales per capita in Japan. Yokohama residents on the other hand, shop both locally and in other parts of Kanto, notably Tokyo itself and cities like Machida and Kawasaki. For the same reason Kobe is sixth in population but ninth in retail sales.

Other cities have retail sales much greater than their population would suggest. Hiroshima for example is only 11th in population but ninth in retail sales because it is a retail destination for the entire region. Many cities with a similar role in their own region, like Kanazawa, also have much greater ratios of retail sales per capita, ratios which will grow due to the city polarisation mentioned above, and suggesting they should become a key focus for retailers and developers.

Not surprisingly Tokyo and Osaka lead in sales densities, but the tiny city of Sasebo is third. Although only the second city in Nagasaki Prefecture, it manages to have higher retail sales than Nagasaki from almost half the space. It draws a number of tourists to the now semi-rehabilitated Huis Ten Bosch theme park, but also workers coming into the city to work in the naval base and shipyard.

Polarised diversity

What this brief synopsis shows is the marked divergence of statistical reality from perception. The biggest cities generally have the highest share of retail sales but even in these obvious cases, there are dramatic differences in performance as, for example, the contrast between Osaka and Yokohama shows.

Beyond the few major conurbations, there are serious gaps between myth and reality, and significant opportunities within. In particular because of the growing polarisation between cities, many businesses selling to consumers will miss out by focusing only on the Kanto region and a few outlying local capitals. There are an increasing number of highly attractive regional powerhouses emerging as well as important satellites for Tokyo, Yokohama, Nagoya and Osaka, and an early mover advantage will be key.