The economic toll of strained diplomatic ties between China and Japan is looming over Japan's retail and tourism sectors, with a report by BMI, a unit of Fitch Solutions, warning of distinct downside risks if the escalating friction persists beyond the short term.

BMI said that Japan faces limited options to substitute missing Chinese arrivals in the short term, given "fixed airline schedules, group-tour dynamics and differing spending profiles".

Due to the potential shortfall in arrivals, duty-free complexes, department stores and luxury retailers in Tokyo, Osaka and Fukuoka have the highest exposure to a loss of revenue, BMI said.

READ MORE: Japan's tourism sector braces for winter chill

Over the medium and long term, the report said that while increased demand from Northeast Asian markets, alongside visitors from the United States, Australia and Southeast Asia, might eventually plug the gap in visitor volume, "fully restoring the high-value retail structure driven by Chinese tourists would prove difficult", given the unmatched consumption intensity of travelers from the Chinese mainland.

This structural challenge is underscored by spending data.

Chinese mainland tourists accounted for 6 million, or more than 18 percent, of Japan's 36.9 million foreign arrivals in 2024, consistently outspending other groups. Despite softer domestic consumption, Chinese mainland visitors averaged $1,622 per trip in the third quarter this year, well above the $1,488 average for international tourists in Japan, BMI said.

The market uncertainty stems from recent diplomatic friction fueled by erroneous remarks by Japanese Prime Minister Sanae Takaichi regarding China's Taiwan. Multiple Chinese ministries subsequently advised their citizens to avoid traveling and studying in Japan. In a swift market response, major domestic carriers, including Air China and China Southern, introduced flexible refund policies for Japan-bound routes.

Fresh aviation data reveal that cancellation pressures are already cascading into the key holiday periods of New Year and Chinese New Year.

Traffic on China-Japan routes slumped 4 percent in the week of Nov 17-23, according to civil aviation data provider CADAS, with outbound load factors down 13 percentage points.

As of Monday, cancellation rates for flights between late November and mid-January next year had climbed to around 12 percent, with some routes seeing more than half of planned services scrapped, data from CADAS showed.

CADAS highlighted that cancellation rates have trended upward and could spill over into the New Year and Chinese New Year peak seasons if the current friction persists.

Notably, the disruptions vary by region. While Tokyo routes remain somewhat insulated by business demand, leisure-heavy destinations are heavily impacted. Industry insiders said Osaka, a hub for tourist spending, is seeing sharp capacity cuts.

"Tokyo routes are seeing fewer cancellations because of their business and transfer demand. Osaka is the opposite," according to Li Hanming, an aviation industry analyst, quoted by financial news outlet Caixin.

ALSO READ: Experts say tense Sino-Japan ties putting business in danger

Online flight tracker DAST projects the cancellation rate for Japan-bound flights could spike to 21.6 percent on Thursday. Meanwhile, Chinese domestic carriers have led the capacity reduction, with China Southern alone removing more than 110 flights from its December schedule, according to aviation analytics firm Cirium.

As travelers redirect their plans, other Asian destinations are seeing an immediate uptick. According to a report by Singapore's Lianhe Zaobao newspaper on Tuesday, the city-state has reported a 15 percent jump in travel bookings.

Analysts at DBS Group Research said cancellations of Japan trips are offering a short-term lift to Singapore's hospitality and leisure sector. China was already Singapore's largest source of tourists between January and October this year, contributing 2.7 million arrivals.

Contact the writers at lijing2009@chinadaily.com.cn