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Japan’s ultra-low interest rates and weak yen will spur foreign investment in the real estate sector due to low financing costs, writes Cuong Nguyen, Head of Asia Pacific Investment Research at PGIM Real Estate, in this guest commentary.
With the near-term outlook for the global economy clouded with the tightening of monetary policy, the Japanese real estate market offers investors relatively attractive opportunities for diversification and stable leveraged returns with the support of a highly accommodative domestic policy.
Unlike most other major APAC countries where base interest rates and long-term government bond yields are rising – in some cases sharply – Japan’s interest rates and bond yields have remained broadly flat at near zero. As it stands, the Bank of Japan (BoJ) still maintains an active bond purchasing program, helping to suppress long-term bond yields and borrowing costs.
There is a consequence to this. As the interest rate spread between Japan and other developed economies has widened, the yen has depreciated, reaching a multi-year low in October of 149 yen per USD. This has meant higher costs for imported goods, particularly energy and food, which is shown in the recent rise of headline inflation. As such, there are concerns that currency depreciation and rising inflation would pressure the BoJ to adjust its policy framework, narrowing the interest spread to support the currency.
However, there are reasons to believe that the BoJ will maintain its accommodative policy for longer. While a weak currency and rising global energy prices have driven headline inflation up 2% y-o-y in recent months, changes to core inflation excluding energy are more subdued at c.1% y-o-y. And now that global energy prices are easing from recent peaks and domestic demand softening, inflationary pressures are expected to weaken, particularly given the chronic deflationary forces of declining population and muted wage growth that continues to characterize the Japanese economy.
At the same time, the economy is also benefiting from a weaker yen, with exporters and major Japanese corporates enjoying stronger repatriated capital, boosting profits and overall business sentiment.
Foreign capital & financing costs for Japan real estate
For real estate investors, there are several implications. For one, history tells us that foreign capital inflows and investment activities tend to rise following a period of weakened yen.
For another, with interest rates remaining close to zero, borrowing costs will also continue to stay low. While the spreads between real estate income yields and borrowing costs have been narrowing rapidly across major markets and sectors across APAC, real estate assets in Japan – take logistics as an example – continue to offer relatively attractive yield spreads. This supports a more resilient outlook for the Japan real estate market.
A more positive sentiment for the outlook of Japan real estate is reflected in ANREV’s Investment Intention Survey 2022, with Tokyo topping the rankings of most preferred markets in APAC. Osaka ranks fourth. Amid rising global uncertainties, we expect real estate investment activities in Japan to hold up well in the coming quarters, particularly in the residential and logistics sectors.
Cuong Nguyen
Head of Asia Pacific Investment Research
PGIM Real Estate
Cuong Nguyen is an executive director at PGIM Real Estate and head of Asia Pacific Investment Research. Based in Singapore, he is responsible for leading PGIM Real Estate’s research efforts in the Asia Pacific and overseeing the research teams that support the investment management activities across the region.
