“Abenomics”—the name given Japanese monetary policies, government spending policy, and structural reforms being carried out since last year under Prime Minister Shinzo Abe—has sent the Japanese stock market up by about 60 percent and weakened the national currency to around ¥100 against the dollar, about a 20 percent decline.
The new vibrancy in Japan’s urban centers—metropolises such as Greater Tokyo and Osaka—has revitalized the real estate market. Transactions worth ¥1.14 trillion (US$114 billion) were carried out between January and March of this year—the highest level since the first quarter of 2008.
However, hurdles remain on the path to success for Abenomics. High government debt levels mean the nation must raise revenue while cutting spending, or at least holding spending steady. Consumers have yet to see the effect of fiscal reforms on their base incomes. Overseas issues, such as the European debt crisis and the slowdown in China, are hurting exporters. Nobody said transforming an economy would be easy.
Many participants at the ULI Japan 2013 Summer Conference, held in Tokyo in July, were hopeful that the government would be able to reinvigorate the economy. “I believe Japan is about to enter a golden age,” said Toshio Motoya, chief executive officer of the Tokyo-based APA Group, which focuses on the development of hotels and condominiums.
The Method
Abenomics remains a work in progress. Policy measures that fail and ideas that meet strong resistance will likely be replaced while sustainable successes will get more support. Even the lawmakers and academics involved in implementing Abenomics do not fully agree on the nuts and bolts of the policies.
Economist and government adviser Etsuro Honda, who spoke at the conference, insisted the first “arrow” of Abenomics—monetary policy designed to beat deflation—must be given priority. The other two arrows—public spending for short-term stability and structural changes for sustainable growth—will not work until deflation is overcome, he said.
“I believe the first arrow is the most important because we have not moved out of deflation,” Honda said. “It is about how we can realize pent-up growth rates. After we can fill that gap, we will be able to reach the third arrow, which is reforms for growth. We cannot realize growth without generating demand and adding to it.”
Unless monetary policy can force businesses and consumers to reach into their pockets and spend, the government is embarking on a Sisyphean task, Honda argued. “Normal people do not pay attention to growth rates when they spend their money,” he said. “They worry about their incomes. When wage levels do not go up, people will not spend, marry, or give birth to new babies.”
The Bank of Japan under the leadership of Haruhiko Kuroda needs to do what it can to encourage spending, Honda said. Companies must do their part by transferring some of their wealth to workers. This “trickle down” will create the conditions needed for Japan to enter a period of sustainable growth, he said.
“Abenomics is trying to launch a cycle of sales going up, prices going up, and wages going up,” Honda said.
Opportunities
Signs are beginning to point to real economic improvement in Japan. Among these are the following:
- In its monthly economic report delivered in July, the Bank of Japan said the outlook for capital spending and industrial production is improving.
- Machinery orders for May, the most recent month for which data are available, showed a 10.5 percent increase from the previous month.
- Consumer confidence has been on a generally upward trajectory since the beginning of the year.
- The government’s Economy Watchers Survey of service-sector sentiment has showed optimism throughout the year.
- The Bank of Japan’s tankan survey of business sentiment was positive in the April–June quarter for the first time since September 2011.
The real estate market, which has seen a sharp increase in activity this year, is likely to start seeing the full benefits of Japan’s economic changes in the second half of this fiscal year, which ends March 31, 2014, predicted Yoji Otani, a managing director at Deutsche Securities. He said the Japanese attitude toward real estate demonstrated a lack of awareness of the opportunities it offers.
“Japan did not know the value of ukiyo-e [woodblock printing],” he said. “European people were impressed by it and increased its value. This can be compared to property. Japanese people should notice the value of property and stop just sitting on their money.”
This does not mean that the value of all real estate will be on an upward trend. Issues such as the graying of the population and the depopulation of the countryside present challenges for investors. But many of the nation’s successful businesses and investors have used these problems to their advantage.
“Population decline was once said to be behind declining real estate prices,” Otani said. “Tokyo’s population increased by 1 million [since deflation began in the late 1990s], though, compared to 170,000 in New York. People saved too much money.”
Motoya explained that APA Group had found success by predicting times of weakness and seeking bargains. The company is midway through a project to develop 50 hotels in the Tokyo metropolitan area.
“Hotel occupancy rates in Tokyo are always 100 percent or so,” he said. “I would say that the asset value has gone up in Japan. Since 2010, the hotels we have built have had about 100 percent occupancy rates.”
Since the bursting of the economic bubble in Japan, APA Group has looked for investments that offer long-term returns amid property price declines and deflation. “When land prices are going up, just keeping properties incurs losses,” Montoya said. “But anticipating a large decrease in 1987, I decided to dispose of assets. Then the bubble burst. We made profit, and what to do with that money was an issue. We purchased aircraft and leased them. This caused initial losses but [generated] capital gains, which meant we paid less tax.”
Others have different strategies. “We do a great job at developing the country,” said Kazuyuki Yamamoto, a senior adviser at Tokyo-based Mori Building Co. “In Abenomics, the competitiveness of cities is one of the solutions being proposed.”
His company is putting the finishing touches on Toranomon Hills, a development consisting of retail space, offices, a hotel, and entertainment facilities near the Shimbashi district in central Tokyo. The contract to develop the area was signed with the government, with a new highway going under the area’s centerpiece 52-story building.
Yamamoto sees projects such as this development, as well as Mori Building’s success over the past decade with Roppongi Hills in Tokyo, as paving the way for expansion overseas. “Infrastructure and urban developments will occur more frequently in the Asian region,” he said. “These projects can be led by Tokyo. The city can attract investors and skilled engineers.”
Hindrances
The success or failure of Abenomics will depend on a number of political and economic factors. The risks ahead include the impact of a tax hike, the inability to carry out effective structural reforms, and instability in the bond market.
The ratio of Japanese government debt to gross national product was 233 percent in 2012—the highest by far among advanced economies. Containing debt and consolidating finances is a priority. To do so, plans to be confirmed by the government this fall will raise the consumption tax from 5 percent to 8 percent next year. A further increase to 10 percent is planned for 2015.
Some at the conference believe that raising the consumption tax before the economy is in a healthy growth cycle will do more harm than good. If consumer spending is curbed, they argue, any progress made in the early stages of the Abenomics project will be reversed. “If you increase taxes too early, you are going to have a negative impact on the economy. The tax should not be raised from 5 percent to 8 percent, but up to 10 percent once the economy is stable,” said Otani.
Others see opportunities in the tax hike. “The increase in consumption tax will receive resistance from society. The central and regional governments could be considered investment opportunities as they deleverage their assets,” said Akio Yamashita, managing director at Tokyo-based Fortress Real Estate Asia. “The weaker yen, for example, could absorb the tax hike.”
Structural reforms pose a bigger risk. Abe’s announcement of the first round of reforms to resuscitate the economy—which have as a focus the formation of special economic zones for overseas investors—was met with market indifference. Businesses in the country are hungry for more, and cynics are quick to point out the snail’s pace at which Japan’s national politics are known to operate.
Like the politics, the country’s regulatory process also can be slow. “I would like to see more speedy environmental assessment. It currently takes three to four years [to get approval],” said Yuichi Nishigori, an executive officer and head of investment at Orix, based in Tokyo. His company hopes to expand into the energy sector, creating solar plants that can make up for the energy lost in the aftermath of the meltdowns at the Fukushima Daiichi nuclear power plant in 2011. “If we can make [environmental assessments] more simple, we can plan business more effectively.”
The more Japan’s notoriously strict regulations are eased, the more his company could do to promote growth, he said. “We would like to make use of abandoned land, so we would like to see the simplification of agricultural laws.”
A July 21 upper house election put the coalition led by Abe’s Liberal Democratic Party (LDP) in control, providing hope that years of parliamentary gridlock has been overcome and that Japan will begin treading a path of stable reform. Still, Naoyuki Okamoto, a deputy director general at the Ministry of Finance who handles Japanese government bonds (JGBs), said he sees risks ahead. “The [JGB] market has calmed down, but I do not think this will be forever.”
Okamoto said he sees hope for future stability because for the first time in a long time, LDP lawmakers are showing determination to carry out reform. However, the Ministry of Finance remains uninterested in the reforms if the books cannot be balanced, he emphasized. “My ministry wants to realize growth strategies without spending money,” he said.
A politician faced with handling this balancing act, Yasutoshi Nishimura, shadow minister of finance, said he believes Okamoto is correct to see a new determination in the government. “If ministers are not implementing reforms, we will fire them. We are going to succeed,” he said.
