Japan Approaches Land Reform With Caution : Real estate: A movement to control spiraling property values is offset by concern over the potential impact on financial markets.
Japan’s land prices are so inflated that many experts fear a sudden drop could devastate domestic financial markets and send shock waves throughout the global economy.
Nonetheless, few believe that such a calamity is likely. Although pressure for land reform in Japan has grown dramatically over the past year, any changes are expected to be slow and cautious.
Japan is only 4% the size of the United States, but its real estate assets are worth $14.9 trillion--four times the value of all U.S. real estate.
A doubling in nationwide land values since 1984 has put home ownership out of reach for most Japanese and driven up business costs in city centers. This has led to calls for reform of what critics call a Byzantine system of taxes and regulation, reform that would make more land available and stop the spiral.
High land prices also have become a trade issue. U.S. officials complain that high rents make doing business here prohibitively expensive for foreign companies, subverting Japan’s claim that it is leveling the playing field for competitors from abroad.
Promises made by Tokyo during trade talks to increase the available land supply through tax and other reforms, theoretically lowering land prices, are likely to be carried out over a long period of time, analysts say.
But these analysts also say the cost of significantly cutting land prices would far outweigh the benefits.
The overheated Japanese real estate market has supported phenomenal growth in Japan’s stock markets and overseas investment. The sense of wealth evoked by ballooning property values has fueled unprecedented consumer spending, contributing to four years of uninterrupted economic expansion.
A Bank of Japan report issued on May 9 said the government should find ways to cool overheated land prices gradually but avoid sudden measures that could hurt the economy.
“Experiences abroad suggest that it is important to forestall any turbulence which might arise from a sudden change in land prices, in order to maintain a safe and sound financial system,” the central bank said.
Economists here agree that a sudden drop in prices would have a disastrous impact on the stock market, on banks and on other lenders.
The integration of Japan’s economy with the rest of the world ensures that such a shock also would hit foreign financial markets.
“The financial markets here are founded on trust in rising land prices,” said Susumu Kato, head of economic research at Goldman Sachs (Japan). “Lots of borrowing for stock trading at home and overseas is based on land collateral.”
A fall in land values would generate bad debts throughout the system and cripple major banks and securities houses, Kato said.
Major financial institutions would face a cash crunch as the value of collateral evaporated. Many would pull out of foreign markets.
That possibility could do particular damage in the United States, where Japanese investment has become an increasingly influential force, especially in the market for U.S. Treasury bonds used to finance the large federal deficit.
A drop in Japanese demand for U.S. Treasury bonds could force the United States to raise interest rates to attract other buyers. Some economists say that would set off a chain reaction that could lead to a recession.
Most overseas investment is based on borrowing against real estate at home. “They don’t have that kind of cash just lying around,” said Ronald B. Talmage, assistant director in Tokyo of the British investment bank N. M. Rothschild & Sons.
The risk of exposure if real estate prices here fall has worsened recently. Commercial finance and leasing firms, for example, have ignored Finance Ministry warnings and increased their lending based on real estate, said David Pike, manager of research at UBS Phillips and Drew International.
After real estate-related loans grew 14.1% last year to a total of $310 billion, the ministry told banks not to let such lending grow faster than overall lending.
Barring more drastic government action, there is little likelihood of a downward spiral in land prices because demand for land remains strong, Pike said.
Land prices climbed only 2% in Tokyo last year, versus 23.8% in 1987 and 65.3% in 1988. But nationwide, prices jumped 17% last year as inflation spread to Tokyo’s distant suburbs and other major cities.
“There’s demand for residential construction and a shift in preference toward larger homes,” Pike said. “Growth in economic activity, new roads and railways, all these use land.”
Demand continues to rise on these islands crowded with 123 million people, but supply remains limited. The Construction Ministry estimates that tax laws and zoning regulations are preventing the conversion of 148,200 acres of farmland and under-utilized sites in the Tokyo metropolitan area alone to commercial and residential use.
Government plans to revise tax laws to encourage development of such land are unlikely to bring about a sudden change, the analysts say.
“If they puncture the land price balloon, it would shock the market, but they’re not going to do that,” Pike said.
The Bank of Japan report called for reforms to curb property speculation and encourage more efficient land use. Financial institutions should also be monitored, it said.
“In our view, the report showed that the Bank of Japan was serious about the land-price problem,” said Kermit L. Schoenholtz, senior economist at Salomon Bros. (Asia) Ltd.
He said the report, which attributed some of the land-price inflation to easy credit, indicated that the central bank would keep interest rates high to help curb excessive lending to land speculators.
The bank’s discount rate, the loan fee to banks that strongly affects other interest rates, remained at 2.5% for nine years until last May. Since then, the bank has raised it four times to curb inflation and help support its weakening currency. It is now 5.25%.
“It’s easy to make doomsday statements, but I don’t think the problem should be exaggerated. The gap (between land prices and other prices) has been growing for 20 years. I don’t see any of that changing overnight,” Schoenholtz said.
