Staggering Land Prices Make the Japanese Economy Less Than a Miracle at Home

You discover the two faces of Japan’s economy in the akihabara , or electronics district. Stores sell Japan’s latest electronic marvels: tiny television sets with screens just a few inches across. But there are also small tables with built-in electric heaters and carpets that are heated electrically. These are intended to keep the Japanese warm in their drafty homes. Central heating isn’t common.

To the outside world, Japan is a model of high technology and splendid efficiency. At home, though, the economy is often inefficient and a bit primitive. Living standards remain below those in the United States. I cite the contrast not to demean Japan’s economic achievements. But both Americans and Japanese need to keep a sense of perspective. The Japanese increasingly criticize other countries’ business and economic policies. Up to a point, that’s fair. But the criticism also allows the Japanese to overlook their own failures.

Japan’s success overseas reflects, in part, its shortcomings at home. Some of the enthusiasm for exporting is a response to depressed domestic spending. The scene at the akihabara is a small reminder of Japan’s largest failure--low-quality, high-cost, crowded housing. Japan could not match American-style housing in the best of circumstances. Only about one-fifth of the country (which is the size of Montana) is habitable, and the population of 122 million is half that of the United States. But government policies have made land scarcity and crowding significantly worse.

In 1986, all the land in Japan had a market value of $9.3 trillion while all the land in the United States had a value of $3.2 trillion. Remember that the U.S. economy produces more than twice as much as Japan’s, that U.S. farms harvest 65 times as much wheat and 220 times as much soybeans and so on. Real estate is acutely scarce and valuable in Japan, but an acre of land shouldn’t cost roughly 75 times as much as in the United States.

Prices of single-family homes within 45 minutes’ commuting distance of downtown Tokyo are about $500,000, reports economist Anthony Downs of Washington’s Brookings Institution. That’s about 10 times their owners’ income. U.S. housing prices are roughly three times buyers’ incomes. In 1988 the median price of a new home was $113,000.

With land precious, government policies ought to encourage families and developers to build up. This would preserve green space and maximize land use. Instead, tight restrictions keep buildings low. The average height of a building in Tokyo is less than three stories. Little is left for parks.

What further compounds this wasteful land use is tax policy. Real-estate taxes are low, making it easy for owners to hold onto their land. If they sell, profits are taxed heavily. Not surprisingly, there’s not much turnover. Developers have trouble acquiring land. Lots that are sold go at astronomical prices. Land taxes for farmers are even lower than average, and the government also subsidizes their incomes.

Prosperity in Japan has become striking in its extreme successes and failures. Production is rising strongly. Unemployment is low. There’s almost no inflation of consumer prices. But the prices of what the Japanese crave most--a home and a plot of land--are inflating at a staggering rate. In 1988 land prices jumped 28%.

The same policies that make land so expensive are also a major cause of a prosperity based on huge trade surpluses.

Japanese consumers save about one-fifth of their incomes, in part so they can afford to buy homes. These savings ought to finance enormous investment in housing and apartment construction. But the government policies that keep land scarce and push up real-estate prices also have the effect of hampering construction spending. Spending by families on new housing as well as consumer goods is held down. With depressed domestic demand, Japanese companies are then driven to look abroad for new markets.

If the Japanese attacked their problems at home more resolutely, their criticism abroad would receive a more attentive hearing. Why do they tolerate this land mess? One reason is that housing conditions have improved. For most Japanese, their recent past, and not U.S. housing, is the relevant comparison. Japanese housing today is about twice as spacious as in the late 1950s. Most homes have flush toilets; in 1963, only 9% did. And new construction has increased recently.

But, equally important, Japan’s most powerful interests really don’t want to change the status quo. Doing that, says one Japanese economist, would require three things: reducing farmers’ subsidies and favorable tax treatment, liberalizing building restrictions, and overhauling tax policies (raising real-estate taxes and cutting taxes on land profits). But none of these changes are expected to happen soon. Each would be opposed by farmers, landowners and various government ministries.

The real reason Japan should act is to help itself. Discontent is slowly rising. Soaring land prices mean that many younger families can’t afford bigger homes or apartments. Japan’s economy should have the same efficient face at home that it has abroad.