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Opinion

Thirty-year high for Tokyo condo prices hides bad economic news

Shinzo Abe's stimulus has boosted cost of housing, not level of wages

| Japan
Real estate companies are focusing on selling units in central city locales near train stations.   © NurPhoto/Getty Images

The last thing Shinzo Abe wants to see in the public discourse right now is talk about 1990. That was the year Japan's bubble economy imploded, unleashing fallout with which officials in Tokyo are still grappling.

Yet the news that condo prices in the Tokyo region have returned to their highest level in 30 years is sure to have economists looking for parallels with 1990 -- and buzzing about a fresh round of irrational exuberance in asset prices. The jump in flat prices in Tokyo and three surrounding prefectures to about $547,000 makes little sense, economically speaking.

For one thing, Japan's longest expansion since the 1980s has been a rather shallow affair, with little wage growth. Seven-plus years after Prime Minister Shinzo Abe began his reflation scheme, consumption has not broadly lifted the economy's performance as hoped.

For another, a return to 1990 peak values seems out of sync with a fast-aging population. As analysts at Swiss bank UBS put it: "Tokyo prices are up for the last four to five years despite the negative demographics of Japan that will eventually drag the property prices down." In other words, the frothiness may not last.

Purchasing volume is becoming rather thin. That suggests the boom is already running out of gas as high prices hit demand. It also could mean condo-buying is more of a speculative phenomenon than one driven by economic confidence.

Some buying is, of course, tied to Japan's urbanization dynamic. Locals are abandoning the countryside in accelerating droves, hence real estate companies' extreme focus on selling units in central city locales near train stations.

It dovetails with the coming Tokyo Olympics, which have also buoyed property values. This boom, though, may have already reached its logical end. The costs of amassing new plots of land in the sexiest neighborhoods are racing ahead. That, coupled with rising construction costs, is propelling condo prices higher.

None of this means Japan is about to crash, 1990-style. Today's corporate sector is far less leveraged and bank balance sheets are infinitely healthier. It does suggest, however, that Abe's team and the Bank of Japan failed to learn the lessons of the last three decades.

Rising land prices are, in many ways, exactly the result Abe hoped for in December 2012 when he returned to the premiership. The trouble is, Japan got here the wrong way.

Back then, Abe set out an ambitious schedule of structural reforms to return Japan to its past vigor. He sought to disrupt a staid business culture and incentivize innovation. Instead, he dabbled in trickle-down economics of the kind that dominated Washington and Tokyo in the 1980s.

The BOJ led the charge with history's greatest monetary onslaught. That boosted the Nikkei Stock Average by 57% in 2013 alone. Tokyo followed with fiscal loosening efforts, including Olympic construction. Yet bold moves to increase competitiveness have been virtually nonexistent. This explains why gains in asset prices raced far ahead of economic fundamentals.

The Nikkei is up 132% on Abe's watch. Haruhiko Kuroda, Abe's hand-picked BOJ governor, took quantitative easing into uncharted territory. That includes hoarding government debt and exchange-traded funds, driving interest rates negative. These policies stabilized gross domestic product and produced record corporate profits.

What they have not done is fuel a broad-based recovery in wages. That is despite the lowest unemployment rate since the 1990s -- and despite a fast-shrinking workforce that, in theory, should be causing a surge in salaries that eventually fuels wage inflation.

Tokyo's biggest mistake was viewing deflation as a cause, not a symptom, of the weak confidence behind it. It thought that if it pushed up asset prices, it would boost the economy, rather than letting the latter boost the former: this explains why Tokyo condo values and stocks are thriving even as the economy limps into 2020. Such superficial payoffs are likely to prove as counterproductive as they are fleeting.

On the one hand, buoyant asset prices allow Abe to declare a reform win. In a 2013 visit to New York Stock Exchange, he implored traders to "buy my Abenomics!" Surging property values may further reduce the urgency for Team Abe to get under the economy's hood.

On the other, they mask Japan's vulnerabilities to a trade war that could intensify. The 6.3% drop in Japanese exports in December from a year earlier was the 13th consecutive monthly decline. As the export engine sputters, there is little afoot domestically to avoid recession. It is doubtful the $121 billion stimulus plan Abe unveiled last month will save the day.

Alas, some sobriety is seeping into the property market. As prices rise, buyers are growing fickle. As Nikkei reported on January 23, the volume of condos on offer in the greater Tokyo region fell nearly 16% in 2019, while units on the market have some of the lowest volume in 27 years.

Again, the early 1990s is hardly what Abe wants investors buzzing about. He would prefer attention to focus on how far Japan has progressed on his watch. But other than surging stocks and property values, it is not clear what the vast majority of Japanese are getting out of it.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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