Property Investment For Foreigners: Japan’s Debt & Demographics Issues
The following is an excerpt from "Japan Real Estate Property Investment For Foreigners Part 2" by Ziv Nakajima-Magen – Partner & Executive Manager, Asia-Pacific Nippon Tradings International (NTI)
Q: It’s no secret that Japan is struggling with the impact of aging demographics – in fact, it’s the world’s fastest aging major economy - and also with very high government debt levels, which limit its long- term GDP growth potential to around 1 per cent per year. Long-term, there are many who wonder how this can sustain the property market.
A: These two painful topics are the subject of prolonged debate and financial wagers over the last 20 years or so – and are probably far too complicated to address in this context – but let ’ s give it a try nonetheless.
While they are both certainly worrying issues, the fact is, both of these situations haven’t changed drastically over the past two decades - and while other economies would be, and indeed have been showing signs of serious economic malaise when if faced with such grim statistics – Japan has been pulling through admirably, managing to maintain a bustling and healthy consumer market, and remain the world ’ s third largest economy in the process – this despite being only 10 th in size population-wise!
The reasons for this paradox range from mindset/mentality – the Japanese do not “ take to the streets, ” embark on bank rushes or feature any tendency for civil unrest – all the way to economic factors such as the self- contained nature of this debt, which is held internally in its vast majority (as opposed to other comparable debt structures elsewhere). Domestic debt in a country which is still very much in “ modern feudal ” mode, albeit a modern, highly capitalistic version of that, means that the chances of any of the creditors attempting to make good on what the government owes them in case of default are much less of a risk than in other countries.
Additionally, the government can, in theory, continue to compensate with additional easing measures, as long as these are performed in a balanced fashion – read some of Paul Krugman and George Soros ’ comments on this subject, both experts who can explain this theory far better than this publication will ever be able to do. In financial circles, the practice of betting on a collapse of Japan ’ s government bond market has been labelled “ the widow maker ” for the better part of the last two decades - and for good reason – many speculators have lost massive fortunes doing just that.
This is not meant to make light of these problems, by any means – the solution is widely believed to lie in two complementing policy changes, both of which will assist in addressing these problems.
The first is a significant increase in immigration, which would inject a much needed youth factor, and create an increase in the working population, as well as in birth rates.
The second policy change is the increased inclusion of women in the workforce – which could practically double Japan’s available GDP production capacity, if tapped. And, while Japan’s current PM comes from a generally nationalistic, ethnocentric background, and therefore seems to be finding both of these issues difficult to tackle – his grasp of economic realities seems to be forcing him to “see the light” in this respect - as he has on so many other challenges facing the country, such as public fund management, dismantling of government subsidiaries and historical inefficient trade and import/export monopolies, etc – only time will tell.
However, both the problems and proposed solutions are extremely long-term views, as will their effect on the economy and, subsequently, the property market. Meanwhile, as the population decreases and smaller townships conglomerate into bigger metropolitan centres, Japan’s bigger cities have been enjoying a rise in both population and property prices, and will most likely continue to do so for the next 10-15 years at the very least. In the short-term, however, and on a cash-flow basis, the most important factor to consider in this discussion is this – Japan’s property market is, by and large, not a capital-growth oriented endeavor, regardless of its performance over the last few years. If one is seeking speculation and growth-oriented strategies, there are far better places in the world to consider purchasing in (Australia, UK, Singapore and some of Asia’s emerging economies come to mind).
Japan is, however, one of the top destinations in the developed world for high rental yields in a stable, regulated and reliable environment – and will remain so for years to come. Add to that equation the fact that, aside from two or three cities, the vast majority of Japan’s metropolitan centres and completely untapped, from the Western investor’s standpoint – and you’ll begin to see why so many are more than happy to be invested here, regardless of any property prices, GDP or government bond market trends.