Weakening Yen presents opportunities in Japan

Although the country is entering a recession, the falling yen is making Japan a highly attractive market for property investors and tourists alike.

Announcements in Japan have given international investors much to think about when considering investment opportunities. Although the country is entering another recession, the falling yen is making Japan a highly attractive market for property investors and tourists alike as record numbers of people pour into the country and buy all things Japanese.

Intriguing times remain par for the course in Japan. This week, to widespread surprise, Japanese Prime Minister Shinzo Abe called a snap general election, which is anticipated to take place on 14 December.

This unexpected development will see the election held some two years earlier than predicted, and is widely seen as the sitting government’s play to win a renewed public mandate for further expansion of their controversial growth-driving policy, combining aggressive monetary easing, higher government spending and deregulation.

The announcement follows hot on the heels of another unexpected decision, which saw the Bank of Japan reveal a bold expansion of its quantitative easing programme on 31 October. This extension will see the bank purchase an additional JPY30 trillion in Japanese government bonds each year. Such a change will increase the national monetary base by JPY80 trillion (USD712 billion) annually, up from the JPY70-80 trillion rise the existing policy would have generated.

Despite the success of these policies in stimulating the stock market and creating jobs, criticism is growing in the wake of recent news that Japan has now suffered two consecutive quarters of negative growth; Japan’s GDP fell at an annual rate of 1.6% in Q3 2014, which followed a larger year-on-year contraction of 7.3% in Q2.

The country is unlikely to achieve the previously stated target of driving inflation to 2% by April 2015, and given the current trend may even drop below 1%.

Many attribute the economic difficulties experienced in 2014 to the effect of a controversial rise in the unpopular Consumption Tax from 5% to 8% that was implemented in April, and the announcement of further monetary easing can certainly be seen as a measure designed to counteract the effects of this hike.

There is an intensifying debate surrounding whether or not Mr Abe should again raise Consumption Tax in 2015, taking it as high as 10%. The BOJ is particularly in favour of the implementation of such a measure and the support its extra revenue would provide to stretched public finances, so it is possible that investors will face a 10% rate from some point next year, once the effects of quantitative easing have been felt.

While all this debate continues, Mr Abe and his government remain relatively popular around the country, and this is perhaps the most important factor in explaining the decision to bring the election forward so dramatically.

A renewed public mandate would certainly give the government more power to press ahead with the extension of their current policy direction, and of course it would also give them extra time to prepare for a subsequent campaign should their measures not be a success.

With none of his opponents enjoying a heavy surge in popularity, and having what will likely be less than a month to prepare for polling day, it seems very unlikely that Japan will see any result other than the reelection of the incumbent.

What does this mean for Japanese property investment?

There are several positive factors to consider for overseas investors. First among these is the continuing weak performance of the Yen. This week, the Japanese currency reached a rate of 118 against the US Dollar, its lowest level since mid-2007.

The Yen has been steadily falling against the dollar since 2012, and the current rate represents a 30% drop in value over the past two years. As well as spurring exports and stimulating growth, currency weakening puts overseas investors in a strong position in the property market– a property that would have cost USD500,000 just two years ago would now cost just USD322,000.

Another consideration is that interest rates that are currently incredibly low at 0.1% and are expected to stay low for the foreseeable future, while Consumption tax, which is levied on the sale of buildings in Japan, will possibly rise again in the new year. Combined, these factors point towards now being a very favourable time to buy property in the country.

The impressive growth of the Japanese tourism industry also presents some excellent opportunities for property investors considering Japan. The sector is fast becoming a focus of Japanese economic policy, some estimates putting its contribution in the same league as the country’s notable auto industry.

The number of visitors has increased sharply, over both the long and short term. In 2003, Japan had 5.24 million tourists pass through its airports, however last year the country hosted a huge 10.36 million visitors, representing a colossal ten-year increase of 97.7%.

This trend is clearly continuing into 2014, with July setting a single-month record of 1.27 million as it became the fifth consecutive month to record over a million visitors. The vast majority of these visitors are from China (22.1%), Taiwan (22.0%) and South Korea (19.7%), with other notable nationalities including Hong Kong (7.2%), the United States (6.5%) and Thailand (3.4%).

Given this strength in the tourism sector, it makes sense for investors to take advantage by entering markets that will enjoy a heavy impact from increasing visitor numbers. One such area in the coming years will be Tokyo, which has been chosen to host the 2020 Olympic Games.

For a more long-term, tourism-related investment, investor attention would be well focused on the growing winter sport region of Hokkaido. Key resorts such as Niseko are seeing excellent yields as visitors continue to flock to the region’s excellent mountainsides for both winter and summer activities.

The new Sapporo airport that opened in 2010 has been a vital factor in supporting tourism growth in the area, and with a new high-speed bullet train link to Tokyo currently planned, domestic and international tourism is expected to continue to see very positive growth.

With resort property investments in Hokkaido now regularly outperforming expectations to deliver yields above 6%, this is a real estate asset class that is very worthy of investor attention.

For more on our property investment opportunities in Japan, see our Niseko Spotlight Page and Akazora  Property Page.