Japan enters the Goldilocks period
Phoebe Goh (13/10/2023) 11 min read
11 min read
Amidst the global high-interest rate environment, where inflation can be experienced in almost all corners of the globe, Japan stands out with its ultra-loose monetary policy. In fact, the Bank of Japan (BOJ) maintained its stand on ultra-low interest rates in September and its pledge to keep supporting the economy until inflation sustainably hits its 2% target. This would imply that the central bank of Japan has no intention to phase out its massive stimulus programme anytime soon.
Real estate in Japan as a viable investment
The BOJ’s decision starkly contrasts with those of the western power houses, which in recent meetings have indicated their resolve to maintain borrowing costs at high levels to rein in the ongoing inflation.
This spells good news for investors from around the world. For one, foreign real estate buyers are looking to Japan as a safe haven for their money, searching for buildings like offices and logistics centres and using Japan’s low interest rates to finance their purchases.
With the post-pandemic era returning things almost back to normal, office buildings in Japan have benefited as local workers have largely returned to the office. Tighter restrictions on the delivery drivers’ work hours meant to safeguard health and safety have also created opportunities in warehouses and other storage spaces.
To top it off, financing in Japan is easily available, and the yen is currently at a 33-year low against the US dollar because of the nation’s ultra-easy monetary policy. Businesses are also doing well, and demand for space is high. On the other hand, rates are rising in many other countries, with credit conditions being tight and large numbers of workers still refusing to return to the office. In other words, Japan, which has always been attractive, is appearing to be much more attractive today because other countries aren’t all that appealing.
According to real estate services provider CBRE, Japan has seen the most real estate transactions over the previous five years in the Asia-Pacific area. Moreover, it is now regarded as the region’s most alluring nation for international investment.
For many international investors, who frequently use loans obtained in yen to finance their transactions, the availability of cheap credit is a crucial element. It is now possible to get positive cash-on-cash, which is basically a return on the asset less the cost of the loan. Additionally, Japanese banks have become more eager to make loans secured by real estate in recent years.
Although market participants are expecting the BOJ to change its policy in reaction to persistent inflation and the rapid depreciation of the yen, analysts are still upbeat and have begun pricing in the likelihood of 10-year government bond yields increasing to 1%, the upper limit of the BOJ’s aim. The yields doubled in less than two months and reached 0.8% on Wednesday last week, marking the highest level in more than 13 years.
Japan will likely continue to be a highly appealing area to investors as long as the interest rate growth there is low, since investors may access domestic debt there. The macro drivers of the market still make it a fundamentally attractive environment, even though the currency rate will fluctuate and the yen will undoubtedly appreciate at some point in time.
Essentially, money is drawn to certainty, and with Japan, there isn’t much uncertainty. In comparison to other countries in the Asia-Pacific, Japan’s office buildings and other commercial real estate enjoy more consistent occupancy rates and profitability. In addition, there are fewer geopolitical concerns than in a country like China, where tensions with the US are rising and the real estate market is in disarray. At least in the near future, it appears that Japan is securing the top spot in Asia-Pacific.
In fact, we are witnessing some sort of construction binge happening in Japan now, with new residential buildings, hotels and office complexes opening up in its city. This construction boom comes even as several Japanese businesses relocate their headquarters outside of downtown Tokyo in a bid to save expenses and embrace remote work. Lixil, a manufacturer of building supplies, relocated its headquarters to a smaller building in Tokyo last year. Fujitsu, an IT company, will leave Tokyo next year. According to Tokyo real estate broker Miki Shoji, the enormous amount of office space and the increased acceptance of a hybrid work style have increased the office vacancy rate in downtown Tokyo to about 6.5%, a nine-year high. Tokyo still has a lower vacancy rate than the majority of other worldwide cities. However, the fact that developers are moving through with large-scale projects is a sign of how confident they are in the Japanese office market. It appears rather certain that there will not be a significant rental correction as there is still enough demand to occupy the new Grade-A office buildings.
Since interest rates are likely to rise in Japan some time in the future, Tokyo should put more emphasis on profitability if it wants to draw in more foreign investment. The good news is that real estate is not the only hot investment that Japan is boasting about. Japan’s prime minister, Fumio Kishida, has also appealed to BlackRock founder Larry Ruby and others controlling $18 trillion of assets to invest in Japan’s future in an attempt to lure capital into the country.
Beyond real estate
During the “Japan Weeks” government campaign, Kishida also hosted some of the top sovereign wealth funds, urging foreign investors to finally turn positive on the third largest economy in the world.
After decades of flitting between deflation and stagnant growth, Kishida has noted that the economy and wages are stronger, and Japan’s stock prices are close to a 33-year high. A restructuring of the asset management sector and an increase in tax-exempt investment vehicles, he added, will enable Japan to fulfill the 20-year-old slogan “from savings to investment” and release $14 trillion in household savings. Japan is determined to transform itself to become an international financial centre and will not hesitate to execute further reforms to open the way towards a new Japan. This is the stand that Kishida has taken to entice financiers to invest in Japan’s future.
A decade ago, the “Abenomics” programme was initiated by former premier Shinzo Abe, which involved the purchase of huge assets by BOJ as well as a corporate governance reform. Today, the Kisihida administration is attempting to finally complete the “Abenomics” project by making foreign investment easier and providing more flexibility and mobility to a rapidly contracting workforce.
Top executives from BlackRock, KKR, Blackstone and sovereign wealth funds like GIC and Norges Bank, as well as state investors Temasek, are rather optimistic as they gather to hear the prime minister’s proposal. Veteran Japan investors have cautioned, however, that there is a limited window for the Kishida team to maintain international interest in the nation. This is because the country has benefited from external factors like global inflation, which has finally assisted in lifting Japan out of deflation, as well as the significant difference between interest rates in Japan and the US. Geopolitical uncertainty over China has also played a part in making Japan appear as an investment sweet spot right now.
However, people need to be confident that this is long-term. And with those large investors, it seems possible now. These investors are not merely here to trade Japan. They are, in fact, looking at the long haul, so their final decisions are crucial for Japan. To facilitate this, the Japanese government has had to step in with messages and funds to support the country’s currency, stock and bond markets, even as Kishida engaged in his promotional activities.
The BOJ bought roughly $13 billion of government debt on Wednesday last week as benchmark bond yields reached their highest level in ten years. The central bank entered the market for the first time since March on the same day by purchasing $472 million worth of exchange-traded funds after the Topix plummeted 2.5%.
While this was happening, the yen rose after crossing the widely watched 150 to 1 threshold, which briefly raised the possibility that Japanese authorities might have intervened following weeks of verbal warnings. Senior government officials have also acknowledged in private that this could very well be Japan’s “last chance” to influence a significant reallocation of foreign capital into the Japanese market.
Kishida was spreading the message about the transformation to his nation even as he marketed Japan’s advantages to foreign investors. On Thursday last week, he highlighted that the economy was about to switch from decades of cost-cutting to investments in human capital. He was speaking to Japan’s largest labour organisation at the time. For the first time in 30 years, the economy has the possibility of entering a new Goldilocks period, according to Kishida, and Japan simply cannot let this chance pass them by.
Going green with investing
With Japan entering the Goldilocks period at present, the nation is doing what it can to attract investors. BlackRock, the world’s largest asset manager, is looking to partner with Japanese business stores to invest in decarbonisation technology. In fact, CEO Larry Fink indicated that he would consider expanding staffing at its Japanese arm.
BlackRock is concentrating on new technologies for the shift to a society with fewer carbon emissions. Fink emphasised the significance of research and development in order to reduce the price of renewable energy, mentioning initiatives like Japan’s work on hydrogen power as an example.
As they transition from being brown to being green, Fink sees some tremendous potential in Japan to co-invest with some of the large Japanese corporations. Tokyo will have more possibilities to become a financial centre if Japan can lead that movement, according to Fink, as the market becomes more alluring to financial services and investment management firms.
Growth is what Japan needs. Decarbonisation, robotics, and artificial intelligence are three particularly promising fields. In addition, Japan’s population decline presents a chance for new technology to drive prosperity in the country. The BlackRock CEO has also given a bullish outlook on Japan from a long-term standpoint.
Analysts are also applauding the Kishida administration’s efforts to encourage household assets to be invested rather than saved. With regards to the government’s tax-exempt stock investment programme, the administration has new plans relating to the Nippon Individual Savings Account (NISA) as a basis to change this enormous pool of savings and to have more of a domestic policy for growth through taking savings and investing for the long haul.
For many foreign investors, Japan has always been a welcoming country, and many have enjoyed successes there. The nation will entice smaller businesses to visit if they think they have a real opportunity. Japan, which has a large amount of government debt, needs to pursue growth by combining private and public finances to create a great chance for success. The younger generation’s growing interest in startups as a shift away from a focus on large enterprises is also a noteworthy improvement for the country.
The US, Europe, Asia and the Middle East were all very interested during the dinner last Thursday with investors, which is a clear indication of growing interest in Japan. With Japan entering the Goldilocks period, we can finally witness how the decades-long “Abenomics” programme was meant to pan out, with the Kishida Administration pushing to make plans work. Perhaps it is time for us to sit back and watch Japan shine as a financial centre.
A Trader’s View
The Japanese yen has been quite volatile recently, as we can see during the first week of this month in October. USD/JPY reached a level of 150 for the first time (the yen weakened) in nearly a year before reversing sharply (the yen strengthened). Within minutes, USDJPY plunges to 147.30 before settling at around 149. The speed and extent of the moves prompted uncertainty as to whether the Japanese authorities had intervened or would take action to support the Japanese Yen for the first time since late 2022. There is a possibility that such sharp moves were caused by the expiry of currency options at the 150 level. Overall, the trend for USD/JPY is up, driven by fundamentals for higher-for-longer US interest rates, while the Bank of Japan remains in its ultra-low interest rate policy. However, there is a strong resistance at 150 to 152 zone. In addition, whether or when Japanese authorities would intervene is unknown. Hence, it could be a little tricky to trade yen-related pairs recently.
Let’s take a look at the technical aspect of USDJPY from the chart below.
USD/JPY H4 Chart
From the above H4 chart for USD/JPY, it is currently trading at around 148.75. From a technical point of view, there is a bullish bias since there is an upward channel formed with a resistance-turn support zone at around 148.26. Currently, there is no signal for the stochastic oscillator indicator. Hence, it would be better to wait for a buy signal to be out before going long on USD/JPY. Alternatively, if the price were to retrace to 148.26, we could go for a long time since it is in our support zone. Lastly, I would also stay out of the market and not have any open positions during upcoming news like FOMC meeting minutes, CPI or unemployment claims to avoid taking uncalculated risks.
Tan Zheng Xiang
