Big economic and social challenges lie ahead for Japan. Among them are weak economic growth, and a declining population. To meet these challenges the government of Prime Minister Shinzo Abe plans to continue the stimulus measures which have been the hallmark of ´Abenomics´ since 2012. These measures should be positive for the Japanese property market (which earns investors moderately good rental returns), but present some dangers for the wider economy as Japan´s national debt mounts.
This past year property values have been almost static. In Tokyo Metropolitan Area existing condominium units’ average prices fell slightly by 0.3% to JPY514,600 (US$4,625) per square meter (sq. m.) during the year to January 2019, in contrast to a 4.6% growth in the same period last year, according to the Land Institute of Japan (LIJ). The wider Japanese residential property price index rose by 2.4% y-o-y (1.5% inflation-adjusted) in November 2018, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Condominium prices were up by 3.7%, detached house prices rose by 0.9%, while residential land prices increased by 0.2%.
Gross rental yields - the rental return earned on the purchase price of a residential property - range from 3.4% to 5.4% in Tokyo’s central districts, according to Global Property Guide research.
Yields are a little higher on smaller apartments. Yields on the very smallest apartments are 5.42%, a reasonable yield.
Japan´s biggest problem is that its economy is slowing, with GDP growth of just 0.7% in 2018, amidst a continuous decline in external demand. The economy is expected to expand by a minuscule 0.5% this year, as the country continues to face both external and domestic challenges. The impending sales tax hike from 8% to 10% in October 2019, exacerbated by the still-unresolved US-China trade tensions, is expected to weigh on consumer spending this year.
Despite this, Japan’s housing market is projected to remain healthy. Housing demand is expected to rise in the first three quarters of 2019, ahead of the implementation of the sales tax hike. Moreover with Tokyo’s successful bid to host the 2020 Summer Olympics, construction activity will remain healthy this year. Demand is currently more or less steady. In Tokyo, existing condominium sales fell slightly by 0.3% during 2018 while sales of existing detached houses dropped 1.2% over the same period. In Osaka, sales of existing condos and existing detached houses increased by 2.1% and 0.4%, respectively.
There are no legal restrictions on foreigners owning real estate property in Japan.
Abenomics - great for property owners!
While the impact of "Abenomics" - i.e., the reflationary policies of Shinzo Abe, who came to power in December 2012 - on the wider economy is debatable, the policy has undoubtedly helped prop up Japan’s property market and boosted residential construction.
Abenomics stimulates the economy by increasing public infrastructure spending, devaluing the yen and aggressive quantitative easing by the Bank of Japan (BOJ). Since the introduction of Abenomics, real estate prices have accelerated strongly. Transactions started to pick up in 2012 and rose rapidly in 2013, as monetary policy kicked in.
We may be seeing the end of the impact of that particular boost. But there may be more to come. Abe is here to stay - he was re-elected again for a third consecutive time as head of the ruling Liberal Democratic Party (LDP) which will make him Japan’s longest serving Prime Minister if he is able to continue his current term that will run until September 30, 2021.
And recently, BoJ member Goushi Kataoka has called on the bank to increase stimulus in order to achieve its inflation target.
In September 2017, the government unveiled a new JPY2 trillion (US$17.8 billion) stimulus package - the fourth in a row. The Japanese government is also considering JPY 10 trillion (US$87.9 billion) stimulus package to offset the impact of a sales tax hike this. The government has vowed that it will abandon its massive stimulus only after inflation reaches 2%.
At the moment, the effects of this stimulus are not very visible. Demand for residential property is falling gradually in Tokyo while a slight increase can be seen in Osaka.
- In Tokyo, the number of existing condominiums sold fell slightly by 0.3% to 37,424 units in 2018 from a year earlier, according to LIJ. Likewise, existing detached house sales dropped 1.2% y-o-y to 18,208 units over the same period.
- In Osaka, existing condominiums sold rose by 2.1% y-o-y to 17,644 units in 2018, while existing detached houses sales were up slightly by 0.4% to 13,644 units.
Land sales are falling. In Tokyo, lots sold fell by 0.3% y-o-y to 11,980 units in 2018 while in Osaka, land sales dropped 3.9% to 2,669 units over the same period. Nationwide residential urban land prices rose slightly by 0.2% in 2018 from a year earlier, according to Japan Real Estate Institute.
Japan’s shrinking population is producing a surplus of housing
One of Japan´s biggest problems is its declining population. It is estimated that Japan will lose a third of its population over the next 50 years, and the population will more than halve from 126.8 million in 2017 to just 50.56 million in 2115, according to the National Institute of Population and Social Security Research. In addition, about 40% of the population will be over 65 years old by 2060.
The shrinking population is already producing a surplus of housing units. There are many sightings of abandoned homes in Tokyo. There are already an estimated 8.2 million unoccupied homes in the country, representing 13.5% of all residences, and up 24.4% from a decade ago, according to MLIT.
The number of abandoned homes is expected to rise to more than 20 million by 2033.
However, declining household sizes may mitigate the situation. The average household size is projected to decline to 2.37 by 2025, from 2.67 in 2000, and 5.0 in 1950. More Japanese are living alone and fewer are living in multiple-generation households.
In an effort to reduce the total number of abandoned homes, some abandoned houses and apartments are being put back on the market by the Ministry of Land, Infrastructure, Transport and Tourism, as part of its new 10-year national housing plan. The plan also proposes to offer some of these houses to low-income earners and families with children, and to replace aging condominiums.
The government is also trying to stop the Japanese population shrinking:
- Childcare provision was boosted by the Child and Childcare Support Act of August 2012.
- Early school education, childcare and child-rearing support services in local communities have been promoted by the Comprehensive Support System for Children and Child-rearing, introduced in April 2015.
- Local governments are being encouraged to offer speed dating and other forms of matchmaking.
- The government is expanding free nursery care.
- Fertility treatment counselling centres in major cities are planned.
In December 2018, the Japanese government amended its immigration policy, to encourage overseas workers to counter its dwindling workforce. The reforms, effective April 1, 2019, create two new visa categories for migrants – Technical Intern Class 1 and 2. The first category targets marginally-skilled workers willing to work in Japan for a period not exceeding 5 years without the benefit of family reunification. The second is directed to semi-skilled workers in certain fields, who are permitted to bring their families as well as make them permanent residents at the end of their 10-year initial working period.
Residential construction is steady
Construction activity is usually a good indication of expectations about the future. Authorized housing starts fell by 2.3% to 942,370 units in 2018 from a last year, after a decline of 0.3% in 2017 and annual rises of 6.4% in 2016 and 1.9% in 2015, according to the MLIT.
In major areas:
- In Tokyo Metropolitan Area, the number of housing starts fell by 4.9% in 2018 from a year earlier. On average, existing condominium units’ prices fell by 0.3% y-o-y per sq. m. in January 2019, new condominium prices rose by 3.3%, detached house prices fell by 7.2%.
- In Osaka Metropolitan Area, housing starts rose by 2.5% y-o-y in 2018, to 121,608 units. On average, existing condominium prices rose by 9.2% y-o-y per sq. m. in January 2019, new condominium units’ prices fell by 6.2%, detached house prices rose by 2.3%.
- In Nagoya Metropolitan Area, housing starts rose by 4.9% y-o-y in 2018.
- In other areas, housing starts fell by 2.8% y-o-y in 2018.
Moderate rental yields, stable rents
In Tokyo’s central districts, gross rental yields - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 3.4% to 5.4%, according to Global Property Guide research.
Yields are a little higher on smaller apartments. Yields on the very smallest apartments are 5.42%, a reasonable yield. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Rents are stable. In 2018, the nationwide apartment rent index rose by a meager 0.1% from a year ago, based on figures from the Japan Real Estate Institute.
In the country’s metro areas:
- In Tokyo Metropolitan Area, apartment rents increased 0.2% y-o-y in 2018.
- In Osaka Metropolitan Area, apartment rents dropped 0.1% y-o-y in 2018.
- In Nagoya Metropolitan Area, apartment rents were unchanged in 2018 from a year earlier.
Interest rates remain very low
The BOJ’s key rate has been below 1% since mid-1990s. As a result, mortgages rates are very low. The interest rate for a 10-year fixed-rate home loan ranges from just 0.75% to 1.2% in Q3 2018. Resona Bank has the lowest home loan rate of 0.75%, followed by Sumitomo Mitsui Trust Bank with a rate of 0.85%, and Bank of Tokyo-Mitsubishi UFJ (MUFJ) and Mizuho Bank, both with a rate of 0.9%. Mitsui Sumitomo Banking Corporation has a mortgage rate of 1.2%.
The "lost decade" and after
Some say that Japan has never fully recovered from the great bubble of the late 1980s. However Japan´s economic performance is sometimes over-criticized, the truth being that over the past decade Japanese growth has been at par with, or better than, Europe´s older economies, especially in GDP per capita terms.
It is true that the world’s third largest economy slowed sharply in 2018, with GDP growth of just 0.7%, after expansions of 1.7% in 2017, 1% in 2016, 1.4% in 2015, and 0.4% in 2014, amidst a continuous decline in external demand. The economy is expected to expand by a minuscule 0.5% this year.
Japan faces a long-term growth slowdown, and it is not obvious that Abenomics is the cure. But if not that, then what? Maybe this is simply what happens to developed economies, especially those with shrinking populations.
Exports falling, amidst strengthening yen
One aspect of Abenomics was an attempt to boost the economy by reducing the Yen´s exchange rate. A strong yen is bad news for the economy and many Japanese companies as it makes Japanese products more expensive. The Japanese yen had previously moved significantly in the desired direction since 2012, depreciating by about almost 37% from US$1 = ¥78 in 2012 to US$ = ¥123 in 2015. After regaining 4.7% of its value in 2016-17, the yen depreciated again by 2.2% against the US dollar in the past year, to ¥110.43 = US$1 in February 2019.
However the Japanese yen has gained about 6.3% against the euro in the previous year, to ¥125.35 = EUR1 in February 2019. Over the same period, the yen also appreciated against the pound and the Canadian dollar, by 4.9% and 2.6%, respectively.
Unsurprisingly exports fell by 8.4% to JPY5.57 trillion (US$50 billion) in January 2019 from a year earlier, according to the Finance Ministry. It was the steepest fall since October 2016, amidst weakening global demand and the ongoing US-China trade dispute. Exports to China, Japan’s largest trading partner, plunged 17.4% y-o-y in January 2019. Shipments to the U.S. increased 6.8% while those to the EU fell by 2.5%.
In 2018, Japan posted a trade deficit of JPY 1.2 trillion (US$11 billion), in contrast to a surplus of JPY2.99 trillion (US$26.9 billion) in 2017, amidst surging costs of energy imports and plunging exports to China.
Inflation remains far below target
Abenomics was intended to stimulate the economy, partly by generating inflation. However Japan’s core inflation, excluding volatile food prices, stood at 0.8% in January 2019 - still far below the BOJ’s official target of 2%.
The government’s ultra-accommodative monetary policy’s failure to boost inflation has led dissenting voices calling for change. Recently, BoJ member Goushi Kataoka called on the bank to increase stimulus in order to achieve its inflation target.
In September 2017, the government unveiled a new JPY2 trillion (US$17.8 billion) stimulus package - the fourth in a row after a JPY28 trillion (US$262.6 billion) round in 2016, JPY10.3 trillion (US$96.6 billion) in 2013 and a JPY3.5 trillion (US$32.8 billion) package in 2014.
The Japanese government is also considering JPY 10 trillion (US$87.9 billion) stimulus package to offset the impact of a sales tax hike this October and to increase public works spending after a series of natural disasters. More specifically, the planned stimulus package includes a “premium gift card” program to provide shoppers with vouchers, a 5% cashback program for consumers using cashless payments, tax breaks for consumers buying homes or cars, and infrastructure projects such as airports and flood walls, among others.
The government has vowed that it would abandon its massive stimulus only after inflation reaches 2%.
Japan has the world’s biggest debt burden. In 2018, the country’s gross debt amounted to about JPY1,327 trillion (US$11.92 trillion), equivalent to about 238.2% of GDP, according to the IMF. However opinions differ about how much of a problem this is.
- World Economic Outlook Database (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/index.aspx
- Monthly Data of Real Estate Economy (The Land Institute of Japan): http://www.lij.jp/english/
- Japan’s Immigration Policy: Turned Corner or Cul-De-Sac? (The Diplomat): https://thediplomat.com/2019/02/japans-immigration-policy-turned-corner-or-cul-de-sac/
- Moderate rental yields on Japanese residential property (Global Property Guide): https://www.globalpropertyguide.com/Asia/Japan/Rental-Yields
- Japan exports (Trading Economics): https://tradingeconomics.com/japan/exports
- Japan’s exports fall most in two years as China shipments weaken (US News): https://money.usnews.com/investing/news/articles/2019-02-19/japan-january-exports-fall-84-percent-year-on-year-mof
- USD/JPY – Japanese yen takes pause after rough week (Market Pulse): https://www.marketpulse.com/20190304/usd-jpy-japanese-yen-takes-pause-after-rough-week/
- The yen may rally further in 2019 (Bloomberg): https://www.bloomberg.com/news/articles/2018-12-30/this-year-s-strongest-major-currency-may-rally-further-in-2019
- Japan Balance of Trade (Trading Economics): https://tradingeconomics.com/japan/balance-of-trade
- Japan logs 1st goods trade deficit in 3 years in 2018 (The Mainichi): https://mainichi.jp/english/articles/20190123/p2g/00m/0bu/039000c
- Japan’s consumer inflation ticks up but still distant from BOJ’s goal (The Star Online): https://www.thestar.com.my/business/business-news/2019/02/21/cimb-promotes-jefferi-as-ceo-of-cimb-investment/
- Shinzo Abe set to be Japan’s longest-serving PM after winning party vote (The Guardian): https://www.theguardian.com/world/2018/sep/20/shinzo-abe-set-to-be-japans-longest-serving-pm-after-winning-party-vote
- Japan government eyes 10 trillion yen stimulus to offset sales tax hike: sources (Reuters): https://www.reuters.com/article/us-japan-economy-stimulus/japan-government-eyes-10-trillion-yen-stimulus-to-offset-sales-tax-hike-sources-idUSKCN1NE0XS
- Japan readies $18bn in stimulus ahead of 2019 tax hike (Nikkei Asian Review): https://asia.nikkei.com/Economy/Japan-readies-18bn-in-stimulus-ahead-of-2019-tax-hike