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BOJ Gov. Haruhiko Kuroda
Economy

New housing may stand in way of Japan's inflation target

Central bank faces new headache, this time in rental market

KEIDAI SANDA, Nikkei staff writer | Japan

TOKYO -- With rents falling in Japan on a surge in construction of apartments, the Bank of Japan may have run into yet another obstacle in its quest to achieve a 2% inflation rate.

In its regional economic report for January, the central bank focused on housing investments across the country. Because new housing can ramp up demand for durable goods, for example, such investments serve as a key economic indicator. The findings were rather grim.

While rents had only fallen a little in Tochigi Prefecture, growing efforts to reduce security deposits, "key money" payments to landlords and other fees pointed to a significant drop in the actual amount renters are paying. In Tokyo, overall occupancy rates in rental properties were edging down amid increasing housing supply.

The report also included testimonies from corporations regarding the increasing number of rental properties and its impact on rents, as well as warnings of an oversupply in certain markets.

Negative interest rates implemented by the BOJ have kept rates on housing loans low, attracting many wealthy investors looking to slash their tax bill. The bank suggested that many landowners began operating rental properties based on similar motives.

The balance in the nationwide market seems to be holding for now, thanks to strong demand for rentals in certain regions. But more people are adopting a cautious outlook, the BOJ said.

Negative rates by nature can have a significant impact on the real estate and housing market. But if new properties flood Japan's market without corresponding demand, rents would crash and efforts to get Japan out of deflation would be derailed. The January report is a reflection of the bank's concerns.

In response to a comprehensive review of its quantitative and qualitative easing program, the BOJ adopted a new framework in September called the "inflation-overshooting commitment." The idea is to maintain easy monetary policy over the long-term until 2% inflation has become the norm. The bank may have to start looking at long-term trends in the housing market as well, focusing on rents and the supply and demand of rentals, rather than having just a short-term perspective by tabulating increases in housing starts.

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