Japan’s real GDP growth for Q4/2015 was revised up to -0.3% quarter-on-quarter (QoQ) compared to an initial estimate of -0.4%, indicating that growth contracted less than initially predicted. Capital expenditure was flat QoQ but remained up by 8.5% year-on-year (YoY). Machinery orders fell slightly in February 2016 but less than expected, indicating that capex may also stay stable into Q1/2016. Core CPI (all items less food and energy) was up 0.8% YoY and 0.2% MoM in February, showing level inflation.

Stability in machine orders and capex provides some room for optimism, but investors are taking a more cautious attitude going into 2016. Unexpected yen strength versus the USD has raised questions about the effectiveness of the Bank of Japan’s (BOJ) negative interest rate policy, and market players are watching closely for signs that the government may announce a delay in its consumption tax hike scheduled for April 2017. A delay could help boost consumption and spur short-term investor sentiment. A July 2016 election in the House of Councillors, and possibly even the House of Representatives may speed political reform or introduce some uncertainty in policy implementation.

Real estate has remained resilient in light of this uncertain macro environment. Rental growth has paused in some sectors, but domestic investment volumes remain strong. LaSalle, for example, launched its logistics-focused Logiport J-REIT in February with an initial portfolio of JPY161.4 billion.

Japan’s impressive inbound tourism figures have spurred a flurry of investment in the hospitality and retail sector. The country welcomed almost 20 million visitors in 2015 – a third consecutive all-time high – meeting the government’s goal of 20 million by 2020 five years early and prompting it to raise its target to 40 million.

The BOJ’s J-REIT purchases for Q1/2016 amount to JPY20.4 billion, implying that the BOJ is maintaining its stated goal of JPY90.0 billion annually. The TSE J-REIT index moved in a volatile manner but gained 8.5% over Q1/2016 to close at 1896.40, only 4.8% down from its 10-year high of 1993.00 in January 2015 and easily outperforming the Nikkei, which was down -12.0% over the same period. The 10-year Japanese Government Bond yield fell drastically after the BOJ reduced its rate for new deposits to -0.1% in January, and ended March in negative territory at -0.029%.

Slow but steady rental recovery and wide yield spreads over funding costs have kept markets active. J-REITs were the biggest buyers, announcing 79 transactions totalling JPY552 billion.

Vacancy rates for Tokyo’s Central Five Ward Grade A and large-scale Grade B Office spaces in Q1/2016 stood at 1.8% and 1.9% respectively. By ward, Grade A office vacancy rates for Chiyoda and Chuo were 0.9% and 1.5% respectively. Minato’s Grade A office vacancy rate also improved to 3.2% as tenants continued to absorb a recent large influx of supply.

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