Korea Goes After Chinese Tourists as Yen Falls

Rajeshni Naidu-Ghelani and Rhie-Young Lim
Jean Chung | Bloomberg | Getty Images

WestnEast, a traditional Korean pancake house in the hip shopping area of Garosugil in Seoul, used to be big hit with Japanese tourists when it first opened four years ago, being featured in a famous Japanese travel magazine.

But now the café is feeling the pinch from dwindling Japanese customers.

"Nearly 40 percent of our revenue used to come from Japanese customers, but that's dropped by nearly 70 percent," Lee Kyung-hoon, WestnEast CEO told CNBC.

WestnEast is one of several South Korean retailers reeling from a recent steep decline in Japanese tourists, the largest group of visitors to Asia's fourth largest economy last year, when they accounted for more than a third of all tourists that visited the country.

But a weakening Japanese yen - which has fallen 18 percent against the U.S. dollar since the start of the year thanks to Prime Minster Shinzo Abe's aggressive policies to reignite the economy - has made travelling abroad more expensive for the Japanese. And South Korea is paying the price.

In the first quarter of the year the number of Japanese tourists to South Korea fell by 25 percent quarter on quarter, according to the Korea Tourism Organization.

The yen has fallen over 20 percent against the Korean won since mid-November and hit its weakest level in more than four-and-a-half years at 10.81 on Friday.

(Read More: Woah, Is It Time to Slow That Yen Fall?)

The Chinese Are Coming

But it isn't all bad news for tourism in South Korea because the Chinese have stepped in where the Japanese have backed off. Chinese visitors to South Korea jumped nearly 40 percent year on year in the first quarter of this year, far outpacing the rise in overall visitors to the country by nearly 10 times, according the Korean Tourism Organization.

Why Are Japanese Tourists Shunning Seoul?
Why Are Japanese Tourists Shunning Seoul?

Ronald Man, economist at HSBC, said the increase in Chinese tourists has more than offset the decline in Japanese visitors so far this year.

"China may become the largest source of tourists in Korea over the medium-term," Man said.

South Korean retailers, meanwhile, are also beginning to embrace different tactics to make them less dependent on Japanese tourists and more attractive to the Chinese.

(Read More: Chinese Overtake Germans as Biggest Spending Tourists)

Gong Ji-sun, a saleswoman at clothes store FITTHEM in Garosugil, said she's displaying more clothes that she thinks Chinese customers would like to wear in her store window. "Chinese customers like baggy outfits, while Japanese like long shirt and leggings," Ji-sun said.

"The Chinese customers are pickier than the Japanese and think Korean products are expensive," she added.

Sung June-won, senior equity analyst who covers the leisure sector at Shinhan Investment said the number of Chinese tourists to South Korea has been rising 50 percent month on month since September when the islands dispute on the East China Sea with Japan erupted, while Japanese tourists have declined 30 percent in the same time period.

"About 70 new business hotels will come into place this year in Seoul and about 60 percent of them target the Chinese with room rates marked below $100 - hotels charge more to Japanese customers," Sung said.

In March, tourist arrivals in Korea topped one million - marking only the second time such a record was set after July 2012. Chinese tourists led the charge with arrivals jumping a whopping 50 percent in that month compared to last year, according to the Korean Tourism Organization.

Wai Ho Leong, senior regional economist at Barclays Capital, said Korea holds a "special allure" for the Chinese with the emergence of cultural exports like K-Pop and as a top destination for plastic surgery in Asia.

(Read More: Move Over Bieber - Korean Pop Music Goes Global)

"There's one thing that can be said about the Koreans - they will reconfigure their operations to cater to other tourist groups and China is a big part of the tourism story now," Leong said.

Only 6 percent or 83 million Chinese traveled overseas last year, which is indicative of the growth potential of this market and analysts expect South Korea to benefit as more and more Chinese travel abroad.

— By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu