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Japan: Go core or go home


Harry Tan (Head of Asia-Pacific, Research) assesses the unprecedented conditions that have shaped the global economy and real estate markets in recent years. He describes how Japan’s authorities, in particular, have been locked in a battle to lift the economy out of its deflationary mind set. Harry highlights the consequences of such actions for the Bank of Japan’s balance sheet and how bank loans to real estate have soared.

The world has been in an unprecedented and extremely accommodative monetary environment for some years now. Many global central banks have eased policy rates to historical lows, in order to support economic growth and spur inflationary expectations. That has led to some success, in many parts of the world, insofar as providing marginal support to nominal GDP growth. But, with substantial excess capacity in many global economies, even as labor market conditions have broadly improved, real activity remains quite subdued. Asset reflation has also not translated successfully into improved domestic final sales and production. Consequently, global growth remains uneven and uncertain. In the same vein, many pockets of regional growth prospects are underpinned by very stimulatory monetary and fiscal policies. It is sensible to assume that unless real domestic demand picks up, the developed world economy will remain in a low interest rate environment for some time to come, sans the Fed.

Since Abenomics (economic policies advocated by Shinzō Abe) was introduced back in 2013, Japan has embarked on a massive stimulus program; on top of efforts for structural reforms. Sentiment has improved, with the initial wave of euphoria driven by foreign capital, due to under-allocation to Japanese equities and real assets. Three years on, institutional interests in Japanese real estate remain strong, suggesting in part optimism that structural reforms will help lift Japan out of the 20-years of deflationary mind-set. Partly, the global 'search for yield' has focused on core, deep and highly liquid markets, Tokyo being one of the core markets providing a wide yield spread and relatively attractive equity yield.

As it currently stands, the Bank of Japan's (BOJ) balance sheet has risen to about 90% of GDP, from about 30% before the introduction of QQE. The BOJ is now the top 10 biggest shareholder of 90% of the companies included in the Nikkei 225 index as well as the biggest investor in JGBs. Yet, inflationary expectations have continued to stay low – suggesting that there is still some way to go before Japan works itself out of the liquidity trap and deflationary mind set. Bank loans to the real estate market have also reached all-time highs, above the levels during the last property boom, of course, in the bubble era, there was no real system for non-recourse loans held directly on company balance sheet, loads of cross collateralisation and poor credit assessment. Corporate balance sheets are much stronger today and loan-to-value is also much lower. That said, against this landscape where excess capital chases real assets in a cheap funding environment, thus driving pricing to elevated levels, it makes sense to buy into prime properties with strong covenants and stable income. We believe that investors should focus on core investments in Tokyo today and a lower gearing strategy to reduce cyclical risk.

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Harry Tan

Harry Tan

Head of Research, Asia Pacific

Harry's biography