Saturday, December 18, 2010

2010 And Beyond - Deflation Japanese Style

"The cause of sustained price falls is a lack of demand. When demand itself is weak, prices won´t rise just through liquidity provision." – Masaaki Shirakawa, central bank governor of Japan
Japan’s structural problems are substantial and well known. A massively indebted government is under pressure to reduce the scale of its borrowings. Demographics are conducive to a contraction in the overall economy, given the impact of ageing is not being offset by net immigration, and Japan’s globally competitive exporters continue to face patchy conditions in most of their overseas markets. Furthermore, the savings rate remains high and bank lending is stagnant, therefore Japan remains susceptible to deflation.

None of this augurs well for Japan’s long-embattled commercial real estate sector. There is also the problem of gross oversupply of property – with the partial exception of the office and retail sub-sectors of Osaka. Over the last decade, Japan has essentially become over developed relative to the needs of its economy.

The last two years have been particularly harsh for the sector. data provided to me in March and July 2010 – confirm that rental rates fell sharply during 2009. Where there were property transactions, they generally resulted in substantial drops in capital values. More recently, there appear to have been minor rises in rents across the board. However, given the actual conditions and protagonists’ expectations, this appears to be little more than a bounce in the wake of a horrendous year. Our in-country sources expect rental rates to track sideways through 2011. Yields have moved in differing directions across the various sub-sectors. The fall in yields in Yokohama over the last year or so is probably reflective of an absence of transactions. The market clearing capital values and yields are, we suspect, respectively lower and higher than they currently appear to be. Looking forward, we expect that yields will track sideways. 
Looking back at the ‘Weak Decade´, we can´t avoid being reminded of Japan´s TWIN decades of weakness. Today, at about 10´380, the Nikkei 225 stands pretty much at the same (nominal) level as it did around 1987. And, it´s A LOT LOWER than it was at the end of its great bull market in 1989. On December 29, 1989, the Nikkei peaked at 38,876. In other words, the price levels of the Nikkei today stand at roughly a quarter of what they were 20 years ago...TWO decades later!

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