For prices and rents to rise, there are certain ingredients that are necessary.  You need a rising population; you must have some degree of inflation; you must have inexpensive, responsible lending and you must have the most populous buyers in the market looking to own rather than rent.

Tokyo almost has all four.  The population has been rising since for the past 60 years and the city is expected to retain its title as the world’s most populated city well into 2030.   For financing, a domestic qualified buyer can borrow at 100bps or under for a primary residence fixed for 10 years with a 35 year loan term.  Principle is paid down from day one and banks will never lend a borrower more then they can afford.

Regarding inflation, real estate generally has been an asset class that promises a strong hedge against inflation.  Unlike stocks or bonds, property prices and rents generally rise and fall according to the inflationary / deflationary environment of the times.

Despite the Abe government repeatedly missing mandated inflation targets of 2% per annum, the general trend has been in the right direction.

Which brings us to the almost part of what Tokyo and Japan still need to see in 2018 for prices to rise further.  The most populous consumers in the Japanese market are the Japanese.  At the moment in Tokyo, many are still hesitant to purchase. 

The reason for this hesitation can be laid squarely at the feet of private corporations dragging their heels on wage growth despite being given the best corporate environment a public sector can provide.

Since his election in December, 2012, Mr. Abe outlined his three arrows of Abenomics and the third arrow was structural reform; a vague term that raised eyebrows for its ambition to eliminate outdated policies relating to the middle class.  This spanned a breadth of topics from increased gender equality in the workplace to increased child care facilities to combat a declining birth rate to the aforementioned 2% per annum inflation target.

With this, Mr. Abe naively expected that the private sector would step up and match wage growth to government mandated inflation targets.  To date this has not happened to satisfaction.  Wage growth since the beginning of Abenomics, while being the highest in decades, still has higher to go before the Japanese people feel confident enough borrowing to purchase real estate.

Clearly Mr. Abe’s patience with the private sector is running out.  On October 22nd, 2017, Mr. Abe and the Liberal Democratic Party were overwhelmingly re-elected on the continuation of Abenomic policies.  Indeed, albeit grudgingly or wholeheartedly, thanks to Abenomics, Japan is experiencing it’s greatest economic expansion since 2001.  Earlier in 2018, it was announced that Mr. Abe’s government will give tax incentives to large and small firms that raise wages and invest in corporate infrastructure within Japan.

On wage growth, corporations are standing on quicksand.  For every new graduate there are now 1.58 positions available making the drive for talent more and more competitive. 

The companies that continue to shun wage growth as a new reality will be the ones who find themselves with severe brain drain as other companies who are more willing to play ball lure workers away with better wages and benefits. These companies that invest more in their people will be the benefactors of increased innovation which means more out of the box thinking and as a result, increased profits.

For Japan, out the box thinking means finding ways of doing business more efficiently, in essence, increasing productivity in the workforce. To anyone who has worked in Japan, increased efficiency and productivity within Japanese companies might bring up a severe bout of skepticism. Said hesitation to believe this can be pulled off is backed up by productivity measurements in both the services and manufacturing sectors.

While Japanese quality is famous, equally famous are the inefficiencies around decision making and adopting new practices of business.  The good news; many of the ways to increase productivity are ways that have long been adopted by overseas companies, many of which Japan Inc. compete with globally so finding a blueprint to emulate in order to achieve this goal is not hard at all.  Should more modern practices be adopted within companies, coupled with Japan’s ingrained cultural tendency to be the best at any task no matter how large or small, then it is not hard to imagine that productivity would skyrocket in the land of the rising sun.   

Increased productivity then justifies sustained wage growth to shareholders thus completing the virtuous cycle much sought after by Mr. Abe.

Why does the matter for Tokyo real estate?  It means that with increased wages comes increased household spending and with that, comes the sense of security to borrow for purchasing a home to live in rather than rent.  The only chart that is still not heading north to the point where even the most bearish of analysts agree that Japan is an unsung opportunity is the wage growth chart. 

2018 will be the year that Japanese companies buckle against the pressure to raise wages.  Once the private sector ensures wages will stay higher than targeted inflation, then 2018 will be the year historians can point to and credit it to the beginning of sustained economic growth and thus, further price and rent increases in central Tokyo.

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