Abenomics seems to be working. Since the implementation of Prime Minister Shinzo Abe’s economic rejuvenation programme, Japan has been making a steady recovery that has returned it to the fore as a global player. The combination of Yen devaluation, infrastructure investment, quantitative easing from the Bank of Japan(BoJ) and a raft of proposed employment policy changes has led to a jolt in the Land of the Rising Sun’s economy — and its property sector — in a short period of time.
The real chance of Japan remaining in the economic doldrums for long was low. Its market economy dates to the Meiji era and blossomed in the post-Second World War reconstruction years. Despite the so-called Lost Decade after the 1980s’ asset bubble burst, the nation of just over 125 million has one of the highest per capita incomes in the world and the globe’s third largest economy, worth approximately US$5 trillion (though its debt sits at around 200 percent of its GDP).
“Japan is a world-class economy. There’s a lot of net worth there. I think a lot of people remember the 1990s, when the bubble popped, and they don’t want that to happen again,” theorises IP Global consultant Chris Lane. “The currency is quite weak right now. If Abe does turn off the tap it will appreciate again. The government is trying to increase inflation, which increases asset values. Sooner or later the banks will find a way to lend to foreigners, for anything … All of that paints a good story to get into Japan.”
Heavy industry (with Japan leading the way in hybrid cars, ultra-high tech electronics and opticals, biochemistry and robotics) telecommunications, retailing, service industries (real estate, financial services, banking and insurance) and tourism, which will see a boost in 2020 when the Olympic Games return to Tokyo, underpin the economy and though infrastructure — from roads to ports to the country’s vaunted rail and Shinkansen network — is already impeccable, Abe plans on propping it up. Little needs to be said about Japan’s cultural industries. Hello, Kitty!
An Emerging Mature Market
Japan’s good fortune is manifesting in the real estate market, which according to Jones Lang LaSalle has seen a five-fold increase in REIT investment over the last year and growing numbers of Asian investors. As of January 2013, only 10 percent of Tokyo property investors were from overseas — compared with 31 percent in New York and 63 percent in London. Odd for a major global financial city. “There’s no limiting factor for foreigners buying in Japan. They can buy anything they want and in my opinion [Japan] has the strongest title in the world,” explains Lane. But the lack of financing from Japanese banks makes it tricky, and is one of the hurdles Abe must leap if Japan is to continue trending up for foreign investors. “The market in general is quite difficult for a foreigner to penetrate. That’s absolutely the case for real estate because no foreigners can get financing. Most of that [stems from] the strict regulation of immigration; everyone wants more foreigners but they make it very difficult to get in. Lately things have changed a little bit, but that has more to do with the Yen.”
Even with those barriers, Bloomberg recently reported that commercial investment transactions in Japan rose 50 percent in the first half of 2013, compared to just 10 percent in Australia, 43 percent in Germany and a 20 percent drop in China. Commercial property agency Cushman & Wakefield predicts Abenomics will push Tokyo’s office market to the apex within Asia-Pacific this year. Demand is expected to be high and vacancy low on the heels of positive investor sentiment. “Landlords are becoming increasingly bullish on the prospects for future rental growth. Some uncertainty remains, however, with the 2014 Consumption Tax increase and necessity to implement real structural economic reforms to ensure a long-term recovery,” said Todd Olson, executive managing director for Cushman & Wakefield in Japan in a statement. “Investment activity is up drastically, as investors view Japan as a good opportunity with rental growth and the upcoming 2020 Summer Olympic Games.”
Japan has a robust domestic market at the moment, thanks to affordable financing from that BoJ relaxation, but residential investment remains focused on Tokyo, Osaka and ski town Niseko. “With the exchange rate tanking lately everything in Japan is 20 percent cheaper than it was a year ago … The ski resort story is great, particularly in light of the growing Asian middle class,” says Lane.
A lot of the chatter around Japan’s property surge has stemmed from monetary policy decisions and a cheaper Yen. “2013 was the worst year for the Japanese Yen in more than a decade. The currency lost over 20 percent of its value against the US Dollar, Euro and British pound and as much as 18 percent against the commodity currencies,” states Aaron Chan, vice president of financial services provider GMO Click in Hong Kong. Chan expects US Dollar and Yen trades to be popular in 2014, though he doesn’t see the Yen flirting with 110 any time soon.
As Olson noted, Abe’s consumption tax is something of a question mark, which he plans to raise the tax to 8 percent this April and to 10 percent in 2015. Hongkongers who recall the kerfuffle over the government floating the idea of a 3 percent sales tax will remember it as … unpopular. But a revenue stream is needed to pay for social services for Japan’s aging population. “This sales tax increase is the biggest risk for Japan’s economy and short Yen trades in the coming year,” says Chan. Gains against the US dollar won’t be straightforward, and “When the consumption tax hits in the second quarter, we expect USD/JPY to correct sharply as the extreme level of long USD/JPY positions are unwound.” How that trickles down to the property market, currently viewed as a bargain, is anybody’s guess. As Chan sees it, the recovery of the Yen will depend on asset purchases and corporate taxes. Still, Chan thinks the Yen will remain a popular funding currency in 2014 and as such, it could break 145 for Euro and 175 for pounds early next year. No telling what it — or a flat — will cost by 2020.