Q : “Japan is struggling with the impact of aging demographics and very high government debt levels, which limit its long-term GDP growth potential to around 1 per cent per year. Long-term, I don’t see how this can sustain the property market…”
A : First and foremost, in terms of Japan’s aging demographics and high government debt levels – this has been the subject of prolonged debate and financial wagers over the last 20 years, and is far too complicated a subject to address in this context. While these are both certainly worrying topics, the situation hasn’t changed drastically over the past two decades – and while other economies would be – and indeed have been – showing signs of serious economic malaise 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 3rd largest economy in the process.
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 – and 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. Domestic debt in a country which is still very much in “modern feudal” mode, means that the risk 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 it is 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 we ever will. 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 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 both of these problems – one being a significant increase in immigration, which would inject a much needed youth factor and create an increase in the working population – and the other being the inclusion of women in the workforce – which could practically double Japan’s available GDP production capacity, if tapped. And, while Japan’s current and recent leaders seem to be finding both of these issues difficult to tackle – his grasp of economic realities, one would personally hope, would force them to “see the light” in this respect, as they have on so many challenges facing the country, such as public fund management, dismantling of government subsidiaries and long-lasting, inefficient trade and import/export monopolies, etc – only time will tell.
However, both these problems and their solutions are extremely long-term views, as will their effects on the economy be – and, subsequently, their effects on the property market. In the meanwhile, as the population decreases and smaller cities and townships conglomerate into bigger metropolitan centers, Japan’s big cities have been enjoying a rise in both population and property prices, and will most likely continue to do so for the next 10-20 years at the very least.
In the short-term, however, and on a cash-flow basis, as discussed in this article and countless others, the most important factor to consider in this discussion, in our opinion, is this – Japan’s property market is, by and large, not a capital-growth oriented endeavor, regardless of its current performance. 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 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 centers are completely untapped, from the Western investor’s viewpoint – and you will begin to see why we, and so many others, are happy to be investing here, regardless of what property prices, GDP and/or the government bond market will do.