Nicholas Spiro

The View | Why Japanese property will remain a refuge as interest rates rise in other markets

The combination of a weak yen, cheap debt, a large and liquid market, and more investible regional cities is an attractive proposition for real estate investors

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Visitors look out at the view while riding an escalator at the Shibuya Sky observation deck in Tokyo on September 29, 2020. The weakness of the yen has given foreign investors a significant advantage in the competition for Japanese property assets. Photo: Bloomberg

Nicholas Spiro

Published: 4:30pm, 22 Aug 2022

The end of the era of cheap money is weighing on sentiment in interest rate-sensitive real estate markets. In the Asia-Pacific, commercial property investment transaction volumes were down 16 per cent quarter on quarter in the second quarter of this year and 37 per cent year on year, according to data from JLL.

In some countries, central banks have tightened monetary policy more aggressively than in the United States, where rates have risen at their most aggressive pace since 1994. Australia, South Korea and India have joined a group of 70 central banks that have increased rates by at least half a percentage point in one go this year.

Yet, one economy continues to be the odd one out. The Bank of Japan remains committed to its decade-long ultra-loose policy despite intense pressure to reassess its stance as other central banks race to raise rates to counter the global surge in inflation.

Japan has suffered the same commodity price shocks other economies have endured. However, rising prices have not fed into higher wages as they have elsewhere, a sign Asia’s second-largest economy is still struggling to boost growth and expunge a deflationary mindset.

With borrowing costs stuck at minus 0.1 per cent, the rate differential between Japan and the US has widened dramatically. This has contributed to a further 19 per cent fall in the value of Japan’s currency versus the US dollar since the start of this year.

The weakness of the yen – one of the most popular trades in financial markets this year – has given foreign investors a significant advantage in the competition for Japanese property assets, making them much cheaper in US dollar terms.