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The restaurants, izakaya pubs and bars that emerge from Japan's COVID crisis will have to make do with fewer revelers as Japanese demographic and cultural shifts spell more trouble ahead for the hospitality industry.    © Illustration by Hiroko Oshima
Asia Insight

Japan's 'izakaya' pubs buckle under COVID alcohol prohibition

Deprived of salarymen and tourists, worst is yet to come

NANA SHIBATA, Nikkei staff writer | Japan

TOKYO -- Kiyotaka Nishimura has closed the doors for good on the 14-seat wine bar and restaurant that he and his wife, Makiko, operated in suburban Tokyo for about 10 years.

Call General Warrant, which offered a contemporary and casual dining ambience, a COVID casualty. It closed in late March, 10 days after Japan came out of its second COVID state of emergency, and the Nishimuras have since moved to Ayabe, a rural town in Kyoto Prefecture, where they plan to take up mountain management and do some hunting.

"The coronavirus pandemic forced the move," Kiyotaka, 43, told Nikkei Asia. Despite developing a takeout menu and winning concessions from his landlord, Kiyotaka struggled to cover monthly rent of 170,000 yen ($1,550) for the bistro's 33-sq.-meter space.

Since the Nishimuras decided to move to the mountains of Kyoto Prefecture, a third state of emergency that covers Tokyo has been decreed and extended.

"I'm positive," Kiyotaka said on April 28, days after the third emergency took effect, "that I made the right decision."

Kiyotaka and Makiko Nishimura have closed the suburban Tokyo restaurant they ran for about a decade and have moved to the mountains of Kyoto Prefecture to take up hunting and other pursuits. (Photo by Ken Kobayashi)

Japan has one of the world's most diverse dining scenes, from sushi bars to authentic Chinese restaurants to trendy Western havens.

Its capital is also the Michelin star capital of the world. The 2021 edition of Michelin Guide Tokyo gives stars to 212 restaurants, far surpassing Paris' 115.

"The food service sector and Japan's food culture provide Japan with some world-class soft power," Nobuko Kobayashi, a partner with EY Strategy and Consulting, told Nikkei.

So many tourists flock to Japan to savor its myriad cuisines that former Prime Minister Shinzo Abe made the traveling gourmands a pillar of his growth strategy. In 2016, the administration announced a plan to double the number of inbound tourists to 40 million by 2020. Now Prime Minister Yoshihide Suga backed the plan as the Cabinet Secretary.

But prolonged COVID emergencies present the restaurant industry with an existential threat. The latest declaration, which took effect on April 25, is Japan's third in a little more than a year. It was to end on May 11 but has since been extended until the end of the month as the virus rages on.

"In areas where a state of emergency is declared, we will cooperate with each local government and take strong measures," Suga said when he addressed the nation on Friday, mentioning a requested ban on alcohol being served at restaurants and other measures.

The latest decree focuses on restaurants but goes further than the second emergency, which simply asked eateries to close early. Now these establishments as well as bars are also being asked not to sell high profit-margin alcoholic beverages. The government hopes to cut the risk of dine-in customers spreading the airborne virus to one another as they take off their protective masks to eat and drink in a closed, shared space.

Many proprietors, though, have had enough of the early closing times, the significant drop in sales that come with them and the multiple delays to the resumption of full-scale operations.

Many others have run out of rope.

According to a report by Tokyo Shoko Research, 842 of Japan's restaurants in 2020 filed for bankruptcy with debts of at least 10 million yen, up 5.3% from a year earlier.

From February last year to April, the number of companies regardless of industry that filed for pandemic-related bankruptcies reached 1,299. Of those, 233, the highest proportion, were in the food service industry, despite the fact that the government has been offering subsidies for pandemic-hit businesses since last year.

The subsidies, however, are much-derided among owners, many of whom consider them paltry. In Tokyo, restaurants that cooperate with the government's emergency requests are eligible to collect 40,000 yen to 200,000 yen in daily subsidies, depending on the size of the business. This is not enough to offset fixed costs, many owners say.

A restaurant street in Asakusa in March: According to a report by Tokyo Shoko Research, 842 of Japan's restaurants in 2020 filed for bankruptcy with debts of at least 10 million yen, up 5.3% from a year earlier. (Photo by Yuki Kohara)

Some restaurants are defying the state of emergency. Global-Dining, a Tokyo-based restaurant chain operator, has filed a damages suit against the Tokyo metropolitan government, citing the municipality's order for restaurants to reduce their business hours. The company claims the order "is illegal and unconstitutional as it infringes the right to freedom of business."

Many restaurant operators that are determined to make it through the pandemic are loading up on bank loans. According to the Japan Foodservice Association, 59 listed food service companies took out 4.6 times more in short-term loans -- worth a total of 365.6 billion yen -- than they did before the pandemic. Although there is no specific data, individual proprietors, too, are taking out more loans, a representative of the association said.

"The question," the representative said, "is whether financial institutions will provide additional loans. This is uncertain."

As for the foreign tourists, their spending power is being sorely missed. In 2019, Japan's foreign visitors spent 4.8 trillion yen, a figure that had increased more than 40% from four years earlier. More than 20% of the spending was on food and beverages, according to the Japan Tourism Agency.

When foreign tourists in 2019 were asked before visiting Japan what they expected to do, eating Japanese food was the most common answer, at 69.7%, according to the agency.

The tourist boom helped make restaurants a key employer. According to the Ministry of Internal Affairs and Communications, the food service industry including hotels in 2020 had 3.91 million employees, and in 2019 it catered to a 26.4 trillion yen market, according to the Japan Foodservice Association.

Now the tourists are all but gone, and there is no telling when the pandemic might end. Japan has already barred foreign visitors from the upcoming Tokyo Olympics. There are calls for aid. "Japan should strategically focus on and support the [restaurant] sector," EY Strategy's Kobayashi said.

The industry is also missing another key customer, Japan's salaryman. For decades, the salarymen of Tokyo, Osaka and other big cities made a habit of stopping for a bite to eat before heading home.

Now many of these cubicle dwellers are working from home, and the younger ones no longer feel obliged to go out drinking with the boss.

"This is the worst crisis ever," said Hiroko Matsunaga, who runs an izakaya Japanese-style pub in the Tokyo neighborhood of Shimbashi.

Shimbashi is known as a nighttime hangout for the salaryman. At least it used to be. During the new normal, many companies have been offering work-from-home options, and in its emergency decree the government has asked corporations to cut the number of workers in their offices by 70%.

"This is the worst crisis ever," says Hiroko Matsunaga, center, who runs an izakaya Japanese-style pub in the Tokyo neighborhood of Shimbashi. (Photo by Yuki Kohara)

As Japan rebuilt itself after World War II, its economy experienced steady, then explosive growth. Eventually, the salaryman, used to working brutally long hours, found himself with some pocket change, and izakaya became his "oasis," said Kuni Takeda, president of K-notes, a Tokyo-based marketing consultancy for the food service industry.

Matsunaga opened her oasis in 1978, about seven years before the go-go bubble economy started to make her customers rich. But the bubble imploded in 1990, and the food service industry peaked later that decade.

Suddenly izakaya, like all retailers, had to compete on price, a race to the bottom that accelerated during and after the 2008 global financial crisis.

Now, with the work-from-home arrangements succeeding, some big companies are selling off their office high-rises. Advertising agency Dentsu Group is considering selling its headquarters building in central Tokyo. The sale, which could be worth around 300 billion yen, would be one of Japan's largest ever property deals.

The pandemic, meanwhile, has also highlighted a cultural change surrounding the restaurant and bar industry. As millennials replace retiring baby boomers, there's a lot less drinking going on.

"The young generation doesn't drink without a specific purpose," K-notes' Takeda said.

Despite feeling like she is "being strangled," the 76-year-old Matsunaga, whose pub has been shut down since late April, is determined to stay in business. She knows the road ahead will be difficult. "I cannot think of my lively izakaya coming back, not even in the future."

Fuming, she added: "It is terrible we are not allowed to serve alcohol. We are not doing business with children!"

Perhaps Shinya Jochi, 33, who manages the Miyuki grilled chicken eatery in Tokyo's Asakusa district, knows how Matsunaga feels. His pub has suffered a double punch from the disappearance of the salaryman and the foreign tourist. When the coronavirus began hitting Japan hard last year, Miyuki's sales fell 80% from their peak.

Asakusa, replete with the ancient Sensoji Temple, food stalls and old-time craft shops, is one of Tokyo's major tourist destinations.

Despite the new normal, Jochi said, "I have no choice but to maintain my daily operations."

The pandemic has also compounded the effects of Japan's shrinking population. Like small operators in other sectors, older restaurateurs and barkeepers are reaching retirement age with no one to succeed them and no one to buy their establishments.

An employee of Miyuki, a grilled-chicken eatery in Tokyo's Asakusa district, cleans up after closing time. (Photo by Yuki Kohara)

Also like other business operators, the restaurant and bar owners who are maintaining their operations are struggling to find workers and having to raise wages to keep their current employees. This is hitting their bottom lines.

Since the sector has been robbed of its customers, weighed down by historic levels of debt and squeezed by societal changes, Yoshihiro Sakata, a Tokyo Shoko analyst, expects to see more bankruptcies after the state of emergency is called off.

Many players acknowledge the pandemic has changed the industry forever, and restaurateurs cannot even count on their regulars returning after the pandemic.

Jochi has already felt a harbinger of this. "Once one of the early emergency decrees was lifted," the Miyuki manager said, "returning sales to their pre-COVID level was impossible."

What can the proprietors do to build a better future?

"There is no doubt that productivity must be improved," said David Atkinson, CEO of Konishi Decorative Arts & Crafts and a former banking analyst at Goldman Sachs. Atkinson said that Japan's hospitality sector, which includes hotels, has low productivity compared to other industries.

Yasuhiro Kiuchi, the Japan Productivity Center's senior principal researcher, noted that "when restaurants try to expand sales, they need to hire more workers, which makes it hard for them to improve productivity." Other industries, meanwhile, can improve productivity by automating.

Kiuchi suggests that restaurants can mimic this by making better use of information technology.

Food & Life Companies, an operator of a chain of conveyor belt sushi eateries, has recently come up with an innovation. Collaborating with the Research Institute of Systems Planning, in December it launched an artificial intelligence-infused payment automation system at three of its 591 restaurants. Now employees no longer have to count customers' plates.

It made the move partly to reduce the risk of coronavirus infection but mostly to boost productivity. Cameras photograph customers as they take dishes off the belt. The AI brain then calculates the number of plates each customer has taken based on the pictures.

Like that, the humble sushi shop became a digital success story, and the chain now plans to introduce the system to 30 of its eateries by the end of September.

Juden Highball in Hokkaido offers private drinking booths equipped with power outlets for smartphones and other gadgets. (Photo by Masamitsu Ito)

While small and medium-size eateries lack the finances and investment wherewithal of big corporations, they can still make improvements, according to Takeda of K-notes. Takeda said that for these operators to win in the new normal, they must work hard to refine their "unique value," which he said is their ambience and service.

In February, Hokkaido-based restaurant operator cultivate opened an izakaya that specifically targets solo diners. Before being renovated -- and before the pandemic -- the izakaya hosted drinking parties and would serve dishes designed to be shared. Now it offers one-person entrees.

Named Juden Highball, meaning "charging highball," the pub offers private drinking booths equipped with power outlets for smartphones and other gadgets. Customers use sanitized tablets to order, eliminating human contact and boosting productivity.

Juden Highball manager Hiroya Osaka told Nikkei that the idea was to give people who are tiring of all the social restrictions a safe place to drink, "even during the pandemic."

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