The outlook for Japan is a big consideration for APN’s Asian REIT investment team. With the Japanese REIT (JREIT) market constituting around half of the fund’s investment universe, we pay close attention to it. Fortunately, and contrary to popular misconception, the country’s economic, financial and real estate markets are travelling well.
Japan isn’t an investment destination that captures the imagination. The so-called lost decade has by some measures turned into two lost decades, a function of a huge asset price bubble, deflation, a weak economy and an aging and declining population. It hardly sounds like a recipe for investment success.
Explaining the reasons for our recent and contrary optimism about the country wouldn’t make much sense without first capturing the flavour of Japan’s recent troubles. Let’s start with inflation, or, more accurately, the lack of it.
Through the 1980s, average annual inflation in Japan was 2.5%. In the 1990’s it fell to 1.2%. Since 2000 it has been a staggeringly low 0.1%, due to lengthy periods of deflation pre and post the Global Financial Crisis (GFC) contributing to this benign figure.
In April 2014, Japan’s consumption tax increased from 5% to 8%, pushing inflation up to 3.6% in June 2014 after which it quickly fell below 1% again. We are however seeing signs of a sustainable level of positive inflation in recent quarters on the back of significant work by the Abe government.
Australia has taken a markedly different track as reflected in the chart below which looks at inflation in the two countries since the 1980. Over the 1980’s inflation averaged 8.5%, the 1990’s declined significantly to 3.0% and since 2000 this has fallen further to 2.7%.