What's Up in 2019

7 Trends & Events that Will Shape Japan and the Japanese Real Estate Market in 2019

Japan endured a tough 2018. The kanji chosen to represent the year was “disaster” (災), to underline the numerous natural disasters that struck the country. No one knows yet what 2019 will hold, but we believe that the following seven trends and events will shape Japan and the Japanese real estate market in particular in the coming year.

Top 7 trends that will shape Japan in 2019

  1. Historically low interest rates likely to continue in near term
  2. Economy facing headwinds from global slowdown. Yen appreciation?
  3. Consumption tax hike to 10%
  4. Construction boom driven by Tokyo 2020 Olympics and re-development projects
  5. Continued growth in inbound tourism
  6. Continued population decline and labor shortage
  7. Internationalization as Japan changes immigration rules

Plus, of course: The accession of Japan’s new emperor

#1 Japan’s historically low interest rates are likely to continue in the near term

Haruhiko Kuroda, Governor of the Bank of Japan. Image: File photo

Speaking to parliament in December, Bank of Japan (BOJ) Governor Haruhiko Kuroda dismissed the chance of a near-term interest rate hike, saying that the central bank must maintain its massive stimulus program to prop up growth. Inflation is far from reaching the BOJ’s 2% target.

Ten-year Japan government bond rates had been declining since 2006 when the BOJ started its negative interest rate policy in January 2016. Rates went into negative territory in July that year, and have been drifting at just above zero since December 2016.
Businesses and consumers in Japan have thus benefited from historically low borrowing rates.

Low borrowing rates make this an opportune time to finance a property purchase

In December 2018, variable rates for home mortgage loans being offered by major national banks like Mizuho, Mitsu Sumitomo, and Risona averaged about 0.525%, with 35-year fixed rate loans being offered with average rates between 1.315% and 1.790%.

The low lifetime cost of financing makes this an opportune time to buy property in Japan, especially compared to the cost of borrowing in other countries.

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#2 Economy facing headwinds from global slowdown

Semiconductor processor. Image: File photo

As reported on Japan Today this morning, the Japanese economy is humming. It is likely to have already tied its longest expansionary phase in the post-war years, with low unemployment and record corporate profits. However, a big missing piece in the puzzle is wage growth.

Exports have also fallen amid slowing demand for components used in smartphones such as semiconductors and liquid crystal displays. If the yen continues to strengthen, Japanese products become less price-competitive. And as we’ve seen in the past, the yen tends to strengthen when world equities markets go down.

Effect of JPY exchange rate on property purchases

The JPY exchange rate vis-a-vis major currencies will, of course, affect the appetite of overseas buyers looking to purchase properties in Japan. Depending on how much the yen appreciates, this can be a significant factor when overseas investors assess whether Japanese residential property is a buy, hold, or sell this year. Let’s see how 2019 goes.

#3 Consumption tax hike

Japanese supermarket. Image: File Photo

The consumption tax is set to be raised from 8% to 10% in October. When the consumption tax was last increased (in 2014), consumers clamped down on household spending which caused underlying inflation to fall close to zero.

Determined not to make the same mistake, the government is introducing a stimulus package worth trillions of yen to buoy demand. Incentives for home buyers include a three-year extension of the mortgage deduction.

The consensus seems to be that some slowdown will have to occur but not enough to cause a major meltdown.

Tax benefits and cash back incentives for home buyers

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#4 Construction boom driven by Tokyo 2020 Olympics and Redevelopment Projects

Construction in Central Ward, Tokyo. July 17, 2018. Image: Sankei

Tokyo has experienced a full-blown construction boom in preparation for the 2020 Olympics.

This is in addition to numerous re-development projects around the city, some of which will not be completed until well after the Olympic games. Major re-development projects are ongoing in Hibiya, Toranomon, the Tokyo Station area, Nihonbashi, ShinagawaShibuya, Shiba-Ura, Yurakucho, and Nishi (West) Shinjuku.

Effect on Real Estate Market

However, the effect on the real estate market is already apparent.

In the 2018 Standard Land Price Survey (Kijun Chika), the average price of land in Japan climbed 0.1 % year-on-year, putting an end to 26 straight years of decline. Nationwide, the main growth driver has been an inbound tourism boom fueling frenzied construction of hotels and shops. For a detailed analysis of the 2018 Standard Land Price Survey, please see: Japan land prices mark first rise in 27 years.

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#5 Continued growth in inbound tourism

Tourist in Japan. Image: File Photo

The number of inbound tourists to Japan has ballooned in the last few years. The government has set a target of 40 million inbound visitors in 2020, and even after the last Olympic athlete departs Tokyo, Japan is pinning its hopes on tourism spending (especially in the regions outside the big cities) to drive economic growth in the face of long-term population decline (see #6 below).

Inbound tourists to Japan by year. Source: JNTO

As we mentioned in #5 above, tourism growth has been the main driver in pulling Japan out of 26 consecutive years of decline in land prices.

2019 Rugby World Cup

In the fall of 2019, Japan will host the 2019 Rugby World Cup, with twelve competition venues throughout the country. The host cities have high hopes for tourism spending that is expected to accompany the games.

In the meantime, throughout the country on the street-level, investment in inbound tourist-friendly hotels and share houses has exploded.

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#6 Continued population decline

Elderly person being helped by nursing care workers. Image: File photo

Japan’s population fell by a whopping 394,373 people in 2017.  The number of babies born in the same year dropped to 946,060 (the second year when new births remained below 1 million) and the lowest level since records were kept in 1899. At the same time, the number of deaths in Japan, owing to an aging population, hit a postwar high of 1.3 million.

The government has warned that the number of Japanese is projected to fall from about 127 million to about 87 million by 2060, of whom almost 40% will be 65 or older.

The long-term implications for Japanese society could be drastic:

The government will have to spend more on medical and nursing care. The labor force is shrinking, along with the tax base, not to mention not enough young people to care for the elderly. The result could be economic stagnation.

What is already apparent is a hollowing out of many small cities and towns around Japan and a severe labor shortage.

Akiya: 8.2 million vacant houses

According to the Ministry of Internal Affairs and Communications, there were approximately 8.2 million (vacant houses) akiya in 2013. Iin 2018, this number likely exceeded 10 million. Moreover, some think tanks forecast that by 2033, over 30% of all Japanese homes will be abandoned and vacant.

This is because as people age and become less self-sufficient, many will move in with family members or go to assisted-living facilities, and eventually pass away. Some will leave behind homes without occupants or caretakers. Even in cases where children inherit these properties, they are often located in places where adult children, working city-center jobs, do not want to live.

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Severe labor shortages

Japan already faces severe labor shortages in a wide range of industries. For more on this, please see: Japan to open doors to 500,000 workers by 2025

This was the impetus behind the new specified skills visa that will be implemented in April this year.

#7 Internationalization as Japan changes immigration rules

In the last few years, internationalization of the population in some neighborhoods in Tokyo and Osaka, is already apparent. As anyone who has visited a convenience store in recent years will notice that almost all the staff are young people from China, Korea, or Viet Nam.

The internationalization of certain areas and neighborhoods in Japan will continue to see more foreigner residents and indeed, start accelerating starting this year.

Japan Specified Skills Visa: New Immigration Regime to go into effect in April

In April, Japan will begin implementation of two new visa statuses that represents a sea change in Japan’s immigration policies towards low-skilled workers and official recognition of the severe labor shortages that the country faces.

Under this new policy, Japan will accept over 345,000 foreign workers from eight Asian countries in the next five years.

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Accession of Japan’s Next Emperor

Crown Prince Naruhito and Princess Masako. Image: Wikimedia

Emperor Akihito of Japan is set to abdicate on April 30, 2019, which will make him the first Japanese Emperor to do so in over two centuries. This marks the end of the Heisei period and  the accession of his successor, Crown Prince Naruhito.

10-Day Golden Week National Holiday Period

The country will mark the abdication and accession with a historic 10-day Golden Week holiday (from April 27th to May 6th).