Japanese Asset Price Bubble
The Japanese asset price bubble was an economic bubble in
Japan from 1986 to 1991, in which real estate and stock prices were greatly
inflated. The bubble's subsequent collapse lasted for more than a decade with
stock prices initially bottoming in 2003, although they would descend even
further amidst the global crisis in 2008. The Japanese asset price bubble
contributed to what some refer to as the Lost Decade. Some economists, such as
Paul Krugman, have argued that Japan fell into a liquidity trap during these
years.
In the decades following Second World War, Japan implemented
stringent tariffs and policies to encourage people to save their income. With
more money in banks, loans and credit became easier to obtain, and with Japan
running large trade surpluses, the yen appreciated against foreign currencies.
This allowed local companies to invest in capital resources much more easily
than their competitors overseas, which reduced the price of Japanese-made goods
and widened the trade surplus further. And, with the yen appreciating,
financial assets became very lucrative. One of the major reasons for the sudden
appreciation of the yen was the Plaza Accord.
So much money readily available for investment, combined
with financial deregulation, overconfidence and euphoria about the economic
prospects, and monetary easing implemented by the Bank of Japan in late 1980s
resulted in aggressive speculation. particularly in the Tokyo Stock Exchange
and the real estate market. The Nikkei stock index hit its all-time high on
December 29, 1989 when it reached an intra-day high of 38,957.44 before closing
at 38,915.87. Additionally, banks granted increasingly risky loans.
Prices were highest in Tokyo's Ginza district in 1989, with
choice properties fetching over 30 million yen (approximately $215,000 US
dollars) per square meter ($20,000 per square foot). Prices were only
marginally less in other large business districts of Tokyo. By 2004, prime
"A" property in Tokyo's financial districts had slumped to less than
1 percent of its peak, and Tokyo's residential homes were less than a tenth of
their peak, but still managed to be listed as the most expensive in the world
until being surpassed in the late 2000s by Moscow and other cities. Tens of
trillions of dollars worth were wiped out with the combined collapse of the
Tokyo stock and real estate markets. Only in 2007 had property prices begun to
rise; however, they began to fall in late 2008 due to the financial crisis.
With the economy driven by its high rates of reinvestment,
this crash hit particularly hard. Investments were increasingly directed out of
the country, and manufacturing firms lost some degree of their technological
edge and Japanese products became less competitive overseas. The Japanese
Central Bank set interest rates at approximately zero. When that failed to stop
deflation some economists, such as Paul Krugman, advocated inflation targeting.
The easily obtainable credit that had helped create and
engorge the real estate bubble continued to be a problem for several years to
come, and as late as 1997, banks were still making loans that had a low
probability of being repaid. Loan Officers and Investment staff had a hard time
finding anything to invest in that would return a profit. They would sometimes
resort to depositing their block of investment cash, as ordinary deposits, in a
competing bank, which would bring howls of complaint from that bank's Loan
Officers and Investment staff. Correcting the credit problem became even more
difficult as the government began to subsidize failing banks and businesses,
creating many so-called "zombie businesses". Eventually a carry trade
developed in which money was borrowed from Japan, invested for returns
elsewhere and then the Japanese were paid back, with a nice profit for the
trader.
The time after the bubble's collapse, which occurred
gradually rather than catastrophically, is known as the "lost decade or
end of the century" in Japan. On March 10, 2009, the Nikkei 225 stock
index reached a 27-year low of 7054.98.
Business Monitor International's Japan Real Estate Report
provides industry professionals and strategists, corporate analysts, real
estate associations, government departments and regulatory bodies with
independent forecasts and competitive intelligence on Japan's Real Estate
industry.
Japan Real Estate Report Q1 2012
From BMI's Q311 update, in which the outlook for Japan’s
real estate market was bleak immediately following the earthquake and tsunami
in March, BMI is now envisaging a return to stability in many areas of the
country’s commercial real estate sector. Demand for modern and earthquake-proof
housing and logistics facilities is increasing steadily, providing
opportunities for developers to begin new projects and complete existing ones.
This demand is also likely to be supported by a potential increase in
investment from overseas, as ongoing debt concerns in the US and eurozone (that
do not see signs of letting up) are pushing investors to the more stable real
estate market in Asia Pacific. Similarly, BMI has recorded instances of
manufacturers looking to emerging markets for their new locations, which may
well increase demand and activity in the industrial sub-sector.
However, there is a downside for Japan that has come out of
the US and eurozone crises. Japanese banks are looking to improve their balance
sheets by cutting back on real estate loans. This could lead to a number of
smaller real estate companies experiencing difficulties as they struggle to
gain access to funding for their projects. In light of this, survey firm Tokyo
Shoko Research Ltd has predicted that the number of bankruptcies in Japanese
real estate will increase in 2012.
Key Opportunities In
The Real Estate Market:
- An increase in the activity of local real estate
investment trusts (REITs) is likely in light of lower prices and this will be
alongside continued improvements in their structure in the country.
- A shortage of available warehouse space will prompt an
increase in development in the sector, and in the medium term, demand for new
premises will continue to support continued supply.
- Over 2011 so far, real estate prices have remained
surprisingly resilient, suggesting that the market is stable enough to weather
such natural occurrences as March’s earthquake and tsunami.
Key Risks To The Real
Estate Market:
- Existing and well known structural problems in the
economy, with the government under pressure to rein in its massive debt.
- The difficulty of smaller firms to refinance their loans
or gain access to funding may cause bankruptcies. This will also decrease
competition in the market, at least for a time, as the larger companies are
likely to soak up this extra market share.
- In the office sub-sector, supply in recent months has
surged and is expected to surpass demand, which will result in a decrease in
office rental levels and an increase in vacant space, particularly in Tokyo.
